For many business owners, the threat of a lawsuit looms above the day-to-day stresses of running a business. A business lawsuit could be financially devastating and lead to a financial hit that you may not recover from. Lawsuits are, unfortunately, sometimes the reasons for business closures and bankruptcies. Ultimately, no business is 100% safe from a lawsuit.
Some professions involve more potential exposure to liability than others. For instance, an obstetrician/gynecologist practice is much more likely to be the subject of a medical malpractice lawsuit than an oncology practice treating cancer patients. If you understand your industry and your individual business’ litigation risks, you can be prepared for exposure to potential litigation and take appropriate steps to reduce and mitigate risk.
This blog post will provide some of our best tips on how to protect your business from lawsuit devastation.
How Does a Lawsuit Affect a Company?
Getting sued unexpectedly can change everything. Regardless of whether you “win” a lawsuit or not, litigation can affect a company and its owners in multiple ways.
- A significant amount of time is spent defending a lawsuit;
- Money is spent defending a lawsuit;
- Lost customers and vendor relationships;
- Tarnished brand image/brand association;
- Negative effect on business sales;
- Loss of trust.
Any way you look at it, defending a business against claims can be extremely draining. In today’s climate of “cancel culture”, depending on the nature of litigation, loss of business can be even more devastating than the cost of settling a lawsuit. In some cases, businesses simply do not recover.
Can a Personal Lawsuit Affect My LLC?
Limited Liability Companies, as their name implies, are meant to limit liability. However, having an LLC does not protect you from claims against you for your personal negligence, such as causing a car accident. An LLC does not protect you from being charged with a crime personally if you commit crimes such as money laundering or fraud while operating as the LLC.
Why Do Businesses Get Sued?
Ever wonder what kind of things you can sue a company for? Businesses become defendants in lawsuits for numerous reasons, which may or may not be legitimate.
Hiring Practices and Interview Questions
Businesses can be sued before they even offer a job to a potential employee if they ask questions during a job interview that could be used to discriminate against a candidate. For example, asking someone if they own a car could be discriminatory if it is not a requirement for a job. Employers can be sued for asking candidates questions about:
- Place of birth
- Marital status
- Having children.
Employers have to be extremely careful about potential work discrimination implications when interviewing candidates. It is common to make friendly small talk, but even light conversations can be consequential. Some questions, such as “Do you have a disability?” are illegal to ask but may be allowed for affirmative action use. A best practice is to ask every candidate the same questions.
Employee Treatment / Illegal Termination
Companies may be sued for various issues with how they treat employees.
- Not making reasonable accommodations for medical requests
- Wrongfully terminating an employee
- Classing an employee as an independent contractor
- Asking employees to work off the clock
- Workplace harassment
- Sexual harassment
- Workers’ compensation disputes.
Businesses can avoid potential employee claims by developing policies and procedures that comply with applicable local, state, and federal laws and regulations. Conducting an HR audit can be a valuable exercise to keep your business out of legal trouble.
Customers can sue a business for:
- Cybersecurity and data privacy
- Consumer protection issues
- Business data protection issues
- Breach of contract
- Selling defective or dangerous products
- Being injured in a slip and fall accident on your business property
- Being injured in a vehicle accident involving a company-owned or fleet vehicle.
- Other accidents and injuries.
Claims by customers can be particularly upsetting, as they can lead to damage to a business’s reputation, which in turn can cause you to lose future business.
Businesses can sue businesses. Some of the common reasons for claims against businesses include:
- Allegations of breach of contract.
- Misrepresentation of financial situations.
- Theft of intellectual property / Intellectual property rights disputes.
No matter who files a lawsuit, litigation brought against your company can be costly. Fortunately, there are a number of actions you can take as a business to avoid litigation.
7 Tactics to Avoid Litigation for Your Company
1. Watch What You Say and Do
Understanding where and how your words and actions can be problematic will keep you out of trouble. As you become experienced in running your business, you will be able to spot business opportunities, vendors, and customers where disputes may arise.
Even if you separate your personal and business dealings, your reputation as a business owner may become entrenched with your business’s reputation in the community. How you respond to a complaint can sometimes (although not always) mean the difference between a customer letting something go and taking the time to pursue legal action.
Tip: How To Stop Someone from Suing You? Listen to Them
As a business owner, one way you can protect your business is by improving your communication and de-escalation skills. In doing so, you will be increasingly aware of your own actions and those of your team.
Learning how to actively listen to others, and recognizing your own major role in how to respond to negative situations without blame or hostility, can ease tension and be beneficial for your business. Sometimes the best way to win an argument is just to let the other party speak, listen, and acknowledge their feelings. It may not be sufficient when injuries are significant and monetary damages are hanging in the balance, but it may ease tensions with customers and employees and allow for conflict-free resolution.
2. Separate Your Finances
If you have an LLC, ongoing separation of your business and personal assets is critical. If you constantly commingle personal funds with LLC funds and don’t account for your business expenses, you will face challenges come tax season, as well as in the event you are sued.
When you form your company, it is worth discussing your company structure, handling of future income, and your liability protection plan with a corporate lawyer. Building your business with the correct structure as a start-up enterprise will protect your personal and business assets as your company grows. If your LLC becomes extremely profitable quickly (a good but real problem to have), you should have a plan to distribute or reinvest funds to limit vulnerability.
3. Hire a Competent Lawyer
Small and mid-size companies do not have in-house legal counsel, so your choice of a corporate lawyer is effectively an extension of your business. Having a competent lawyer can help with avoiding litigation, and strategically handling claims that arise to reduce the impact as much as possible.
Because legal defense is not cheap, you need an experienced, knowledgeable, and effective communicator advocating for you. Your lawyer should fully understand and be able to clearly explain the claims being made against your business, and the potential exposure.
4. Practice Strong Data Protection
As a business, you must protect yourself and your customers from vulnerabilities due to hacks, viruses, ransomware, and other issues related to privacy. There are a number of things you can do to maintain privacy and protect data:
- Get cyber insurance.
- Have a strong password policy.
- Secure your company Wi-Fi.
- Evaluate BYOD (bring your own device) policies and vulnerabilities.
- Maintain employee and customer confidentiality and limit employee and contractor. access to confidential information.
- Back up your files securely.
- Keep your security software updated.
- Require employees to update the software when available.
- Train team members and contractors on security policies and procedures.
If you are not sure how to monitor security and compliance, take a cyber security risk assessment to ensure you are taking appropriate steps to reduce and mitigate cybersecurity risk.
5. Use Written Contracts
Handshake deals are nice in concept, but they should never be official. Verbal agreements simply do not hold up in court the way signed contracts do. Relying on a business deal based on a verbal promise or a handshake can be a costly mistake. Your clients should understand your request for a written agreement. If they do not want to put a deal in writing, you might want to reconsider doing business with them.
If you have clients or vendors sign formal contracts or non-disclosure agreements often, have your lawyer review them and ensure you’re covering the important points and your language is clear and unambiguous.
6. Get the Right Liability Insurance
What is business liability insurance and do you need it? As a business owner, it is realistic to anticipate that if you’re in business for a while, you will have to deal with claims at some point. Although insurance is an expense, it is a necessary one to reduce the impact of litigation from damages, injuries, and losses. The types of insurance you need will depend on the nature of your business. Types of insurance you may need to include:
- Property insurance
- Liability insurance
- Business auto insurance
- Workers’ comp insurance.
Some insurance providers offer a business owner policy (BOP) that bundles multiple types of insurance into a single policy. An umbrella policy can offer additional protection.
7. Avoid Employment Discrimination
It is critical that you understand the ways employee and work discrimination issues can lead to employee claims and labor lawsuits. To protect yourself from litigation, you should:
- Understand the state and federal labor laws that affect your business.
- Hire an HR consultant to review your policies and compliance.
- Have a knowledgeable corporate lawyer ready to represent you.
- Communicate with your employees clearly and encourage discussion of any issues to resolve them before they escalate into lawsuits.
- Have procedures for employee complaints.
Well-meaning business owners can become embroiled in discrimination lawsuits simply because they do not understand applicable laws. Having an anti-discrimination policy and mandatory anti-discrimination training programs can help avoid litigation in this area.
If you are a business owner facing litigation or want to discuss how you can protect your business and assets, contact Sequoia Legal to schedule a free consultation. Our Denver business lawyers offer personalized, boutique legal service with the big law experience and representation that the global litigation firms offer.