In today’s litigious society, being sued is a major concern for many small businesses. According to a National Federation of Independent Business (NFIB) Research Foundation National Small Business Poll, half of small business owners reported being “somewhat” or “very” concerned about the possibility of being sued.
And it’s a valid concern. In 2008, a study by the U.S. Chamber Institute for Legal Reform reported that American small businesses paid over $105 billion in tort liability costs. And small businesses spend nearly $36 billion to settle lawsuits each year.
Even one lawsuit can financially cripple a small business. The median cost of litigation can range from $54,000 for a premises liability case to $122,000 in a medical malpractice case—and these are just median costs.
Business owners obviously need to take precautions to protect their businesses from legal action. But just of equal importance, they need to take great care to protect their personal assets from business-related suits as well. So what are some of the things you can do to help protect yourself?
Incorporate or Establish an LLC
According to NASDAQ, the first step is to incorporate your business, or establish a Limited Liability Company (LLC). This separates your business and personal identity—which means your personal assets are protected in the event your business is sued.
Never Combine Your Personal and Business Finances
Even if you have a separate corporation or LLC established, you could still be at risk if you combine business and personal finances. It’s strongly recommended that you maintain separate accounts for both, and conduct all company business on documents that bear your business name.
Consider Buying Personal Liability Insurance
Forbes recommends having personal umbrella liability coverage that’s equal to your net worth. Even if you have business liability insurance, you need the extra protection that personal coverage provides.
Avoid Personal Guarantees
Don’t use your personal name to sign company contracts and, instead, use your official job title. If you agree to be personally responsible for a loan or debt, you might lose the protection of your company’s status. In addition, if you sign a contract with your personal name instead of signing in your capacity as an officer of the company, you could become personally liable.
Keep Good Records
Make sure that all company documents are in order, and your fees and licenses are current. Be in compliance with all state laws, and be sure that all your required business reporting is up-to-date. Any holes in this documentation can put you at risk.
But sometimes it’s not enough to make sure your personal assets are protected from any legal action taken against your business. Here are two more tips to help protect your business assets from litigation:
Consider Purchasing Business Liability Insurance
At the very least, you may need general liability insurance, the U.S. Small Business Administration emphasizes. This type of policy protects business owners from incidents that happen in the regular course of business. Additional liability insurance policies are available, and advisable—depending on your line of business. These include automobile, product, professional, and commercial property liability coverage. Casualty and business interruption insurance can provide an extra layer of protection, as well.
Get Everything in Writing
RocketLawyer emphasize the importance of putting everything in writing and keeping good records—particularly when dealing with your employees. Have an employee handbook, keep employee training up-to-date, and document all disciplinary action. Also, immediately record any customer complaints you have, and keep thorough records of your responses to those complaints.
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