to protect your
business from lawsuits
BizBest: Whenever I see a fellow business owner, it seems they are being
sued for one reason or another. Lawsuits are getting out of hand, and
small businesses are suffering. I’m worried I could be next. What can
I do? — Worried
You’re wise to be worried. The road to entrepreneurship is filled
with legal potholes.
“With the dramatic
rise in the cost of lawsuits, many small businesses fear even the possibility
of being sued,” says Elizabeth Gaudio, senior attorney with the National
Federation of Independent Business Legal Foundation.
A new study by the
NFIB — America’s largest small-business advocacy group — found that the
median cost to settle a legal dispute for a small business is about $5,000.
the average small-business owner’s salary is less than $50,000 a year,
it’s easy to understand the economic pressures to settle,” adds Jack Faris,
president of NFIB. “Business owners say being sued is one of the most
threatening experiences they encounter — especially for the smallest firms
that could be put out of business by one frivolous lawsuit.”
Don’t just hope legal
troubles will pass you by. Develop a strategy to ward them off. Here are
some tips on how to do that from Gaudio of the NFIB Legal Foundation:
- Go corporate.
By incorporating your business, you can protect personal assets
and limit any liability to your business assets. Make sure you follow
corporate procedures and have an attorney or accountant review your
- Know the law.
Ignorance of the law is no defense, and a good way to get into legal
trouble. Focus on these areas: employment law, health and safety law,
tax law and environmental law. Make sure employees are well trained
and aware of discrimination laws.
- Insure yourself.
Make sure your business insurance covers you in all situations. If your
insurance does not cover a claim, the injured party may go after your
personal or unincorporated assets. Coverage may be available through
an umbrella policy and Employment Practices Liability Insurance.
- Manage fairly
and wisely. Try to make good hiring decisions from the start. Interview
thoroughly but fairly. All applicants should be treated equally and
asked the same questions. Set clear expectations with new hires by providing
a written job description and the company’s code of conduct. Provide
written policies stating that discrimination and harassment will not
be tolerated. Tackle problems early and enforce policies consistently
with each employee.
- Classify employees
correctly. Many recent lawsuits have alleged misclassification of
consultants and salaried “exempt” employees under the Fair Labor Standards
Act. This can cause disputes involving overtime pay and tax withholding.
Be particularly cautious not to incorrectly classify an employee as
an independent contractor.
- Watch out
for workers’ comp claims. Stop workplace accidents before they happen.
Implement proactive training procedures and a written safety plan. Report
claims immediately — waiting even a week causes settlement costs to
document, document. Writing and keeping documents is vital. Create
a document retention policy that everyone must follow.
These resources can
help in your quest to stay out of court:
- The American
Arbitration Association is a not-for-profit organization with offices
nationwide offering dispute resolution services as an alternative to
going to court. Visit www.adr.org.
- The NFIB Legal
offers excellent legal defense tools for small business, available free
- The Small Business
& Self Employment section of the IRS Web site describes the federal
tax agency’s rules on independent contractors. Visit www.irs.gov/smallbiz.
- The HR Answer
Book by Shawn Smith and Rebecca Mazin (AMACOM Books; $24.95) offers
expert Q&A style advice on key legal issues involving employees. Visit
- The U.S. Small
Business Administration Web site has helpful advice on writing job descriptions,
the interview process and other topics. Visit the “Managing Employees”
section at www.sba.gov.
Daniel Kehrer (email@example.com)
is founder of BizBest (www.bizbest.com),
which publishes “The 100 Best Resources for Small Business.”
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