As a small business owner, the threat of litigation looms larger than you might think. Legal disputes can drain your finances, consume your valuable time, tarnish your hard-earned reputation, and in worst-case scenarios, force you to close your doors permanently. While you can’t eliminate all risk, implementing strategic legal safeguards can significantly reduce your vulnerability to lawsuits.
Choose the Right Business Structure
One of the most fundamental ways to protect your small business from risk is selecting the appropriate business structure. Many business owners operate as sole proprietorships or partnerships due to the simplicity of starting and managing these entities. However, these structures offer no separation between personal and business assets, leaving your personal property vulnerable to business liabilities.
For stronger protection, consider forming a limited liability company (LLC) or corporation. These business entities exist separately from their owners and are responsible for their own liabilities. As an LLC owner, your personal assets typically can’t be used to satisfy business debts or obligations. This protection creates a crucial shield between your personal finances and business risks.
Remember that liability insurance offers additional legal protection for business owners and can minimize litigation risks by providing funds to pay for potential losses. You can learn more about business structures and their protections here.
Maintain Separation Between Business and Personal Activities
When you structure your business as an LLC or corporation, business law requires you to separate your business and personal finances. Failing to do so risks “piercing the corporate veil,” which can remove your LLC’s liability protection and allow creditors to come after your personal assets.
Beyond maintaining liability protection, keeping your personal and business finances separate offers additional advantages: it helps you better monitor cash flow, simplifies bookkeeping, establishes your business as a separate entity, and allows you to build business credit—essential when applying for loans or forming relationships with vendors.
Put Everything in Writing
The foundation of protecting your business from lawsuits lies in maintaining thorough and organized records. Accurate documentation can make all the difference if a dispute arises. It’s essential to formalize your business relationships through written contracts, whether it’s an employee agreement or a supplier contract.
Far too many young company owners trust verbal agreements, which is a recipe for disaster. Whenever you start a relationship with another party—whether it’s a service provider, business partner, or client—make sure all terms are agreed upon and confirmed in a written contract. This way, all disputes can be resolved by assessing the contract.
Protect Your Intellectual Property
It’s vital that you keep your intellectual property safe to avoid ending up in court. Copyright laws protect pieces of work and authorship. Not only do companies need to copyright their own materials, but they need to pay attention to what they use from someone else’s IP, like photos or videos.
A trademark can protect your business from brand or name infringement. Registering a trademark also protects your business from potential litigation (for instance, if you unknowingly use a name that is already trademarked, you could be sued. The registration process will help you discover whether a name is free to use).
According to trademark attorney Perry Clegg, “If your business has invested in intangibles such as inventions, content, designs, or marks or logos that uniquely identify your business or products, then you will want to take steps to ensure you get a return on that investment.” Find more information about intellectual property protection here.
Maintain Business Compliance
Once you form an LLC or corporation, you must maintain its good standing status with the state where your entity was formed. Good standing requirements vary by state but generally involve filing annual reports in a timely manner, paying franchise taxes, having the required business licenses, and maintaining a registered agent.
Maintaining your business’s good standing helps preserve your LLC’s limited liability protections, allows seamless expansion into other states, enables quick obtainment of a “Certificate of Good Standing” as required by lenders, and helps you avoid potential state fees and penalties.
Obtain Proper Insurance Coverage
Another way to minimize risk is to get the right insurance for your business. While LLC protection is critical, it only goes so far, such as protecting your personal assets from a lawsuit. Business insurance can serve as a safety net, protecting both your business and personal assets against unexpected events, such as accidents, natural disasters, and lawsuits that could cripple your business.
Insurance plays a critical role in protecting your business from the financial fallout of a lawsuit. A Business Owner’s Policy (BOP) typically includes general liability insurance, which can cover incidents like bodily injury, property damage, and advertising issues. Additionally, umbrella insurance can provide extra coverage beyond your standard policy limits, safeguarding your business from costly claims.
Work with a Qualified Attorney
One of the smartest moves you can make as a business owner is to establish a relationship with an experienced attorney. Having legal counsel readily available means you can get advice when situations arise rather than scrambling in the face of a lawsuit. Look for a lawyer with experience in small business matters and consider keeping them on retainer to stay prepared for any legal challenges.
Asset protection attorneys play a critical role in safeguarding your wealth by providing expert legal guidance. They assist in selecting and setting up appropriate protection structures, navigating complex laws and regulations on your behalf. Trustworthy attorneys are indispensable in successful asset protection planning, ensuring that your strategies align with legal requirements and best practices.
There should be no “winging it” when it comes to something as important as your business. If you are unsure of a contract or have any doubts regarding your business, a lawyer will be able to step in and read the situation. He or she will be able to explain contracts and specific terms within a contract that you may not understand.
Implementing Cybersecurity and Information Protection
Whatever your IT strategy—whether it involves a single laptop with one email account or a more comprehensive enterprise IT with CRM, marketing automation, and cloud services—cybersecurity must be part of it. Small businesses frequently find themselves in the crosshairs of cyber attackers because they lack the sophisticated controls that larger enterprises implement. And all too often, a cyber breach can result in business downtime, reputational damage, loss of business, and even litigation.
Take action to understand your business’s vulnerabilities and potential liabilities. Have a plan to continually back up company data and store it securely. Then establish a cybersecurity policy that outlines best practices for ensuring the security of company, employee, and customer data.
Taking Action to Protect Your Business
Being proactive about legal protection isn’t just smart business—it’s essential for your company’s survival and growth. The cost of implementing these safeguards is minimal compared to the potential financial devastation of a lawsuit. By choosing the right business structure, maintaining proper separation between business and personal finances, documenting everything in writing, protecting your intellectual property, staying compliant, obtaining appropriate insurance, and working with qualified legal professionals, you create multiple layers of protection for your business.
Don’t wait until you’re facing a lawsuit to think about legal protection. Contact our law firm today for a comprehensive review of your business’s legal vulnerabilities and let us help you implement a customized protection strategy. Your business deserves the strongest possible shield against legal threats—and we’re here to help you build it.
