The law as a shield: protect yourself and your business

Is the threat of a lawsuit a real fear?

As a small business owner, you may be one of the 48% concerned about frivolous or unfair judgments. According to the US House Law Reform Institute, actual lawsuits and fear of lawsuits cost US small businesses $ 98 million in 2005. That figure may seem large because it includes money spent. in damages, settlements, legal costs, liability insurance premiums, and costs incurred by insurance companies on behalf of policyholders. Is the fear of lawsuits a real fear? Unfortunately yes. Anyone can sue anyone for any reason at any time. In reality, 46% of small business owners have been threatened with a lawsuit, 34% have been sued in the last 10 years, and 62% have made business decisions to avoid lawsuits. In fact, small businesses bear 69% of the total cost of the tort system for all American businesses.

What is the best course of action?

What Can a Small Business Owner Do? For starters, keep in mind that the best defense is a great offense. While most small business owners fear the law, it is much wiser to use the law as a protective shield. There are many business and legal components that help create the strongest shield possible: business entities (the type of structure that governs your business), insurance, and intellectual property (copyrights, trademarks, patents, and trade secrets), to name a few. .

As a former full-time practicing attorney and now a small business owner, I have been on both sides of the fence when it comes to the legal issues a business owner can face. It is imperative that entrepreneurs understand the basics of the legal aspect of running a business and how to use the law as a shield to protect themselves and their business.

Creating a shield through the business structure

The first element that a small business owner should consider is the structure of the business. There are 4 basic types of business entities: sole proprietorship, partnership, corporation, and limited liability company. A common misconception of small business owners is that the business entity itself always creates a legal shield. In some cases (a corporation or limited liability company, for example), this is generally true. However, if you are a sole proprietor (and, if so, you are not alone, as 78% of all small businesses in the US are sole proprietors), then you essentially have no shield. As a sole proprietor, you are personally liable for all business debts and other obligations. Fortunately, the law is not the only way to create a shield to protect your business. If the business entity itself does not provide a shield, you can create one by purchasing adequate and adequate insurance coverage. Therefore, a sole proprietorship that is adequately protected by insurance can have an effective shield.

In the case of partnerships, another misconception is that the partnership is a separate legal entity that provides a shield. A partnership is essentially a sole proprietorship run by two or more people. Therefore, the structure itself does not provide a shield. Again, insurance can be used to fill the gap and / or a different business entity can be chosen. For example, did you know that you can create a corporation and the same two people who would have created a corporation are now shareholders? What about a limited liability company with more than one member? There are many ways for two or more people to own a business together. Carefully consider which one makes the most sense, not just from an operations and decision-making standpoint, but to get the most legal protection for the owners involved.

Even with corporations and limited liability companies, there are limits to the strength of the shield. It is not enough to create a business entity. The business must function as a distinct legal entity, including refraining from mixing personal and business funds, keeping personal guarantees to a minimum on behalf of the business, maintaining corporate / business records, and paying business-related taxes. If the business entity is a sham or the owner does not follow the rules in terms of keeping the business shield up, a court can apply the legal doctrine of “piercing the corporate veil” if the business is sued. Piercing the corporate veil allows a litigant to pierce through the business structure and reach the owner personally. Of course, piercing the corporate veil only applies in very limited situations, but it should be used as a reminder to maintain that shield at all times when it comes to operating your organizing business as a distinct legal entity.

Creation of a shield through a written agreement with the client

When you agree to perform services for a client, and the client agrees to pay you for those services, you and your client have entered into a legal contract. The terms of the contract, however, are difficult to remember and prove unless it is in writing. A written contract is critical as it advises clients of business terms and policies, sets a professional tone, promotes policy coherence, and is legally enforceable in court (the decision to sue a client to enforce a contract it is, of course, a business decision, as well as a legal decision, and must be carefully considered). The contract, therefore, helps prevent misunderstandings and clearly defines the expectations of the parties.

Some entrepreneurs choose not to use contracts for fear that a written agreement is too formal or legal in nature and may therefore scare a customer. Again, this is a business decision to consider, and you need to determine whether it is a real or imagined fear by reaching out to your customers to test the waters. You can also use a “letter agreement”, which can be less intimidating for clients. In business, a written contract is generally expected. Another disadvantage of using a written contract is the cost to create and advise if you use an attorney. While there are standardized contract forms available online and in books, be careful not to accept such standardized white card forms. I often see small business owners not tailoring contracts properly, leading to embarrassing typos, inappropriate clauses, and general confusion. Not only does this seem unprofessional, but in extreme cases it can also result in the unenforceability of the contract in court. Therefore, it is a good idea to have a business attorney review the agreement to make sure it adequately protects you, contains the relevant terms, and meets the goals you want to achieve. It is an expense worth paying to ensure adequate long-term protection.

One word of caution: stay away from “legal jargon”. Use plain language to make the agreement easy to understand and help, rather than hinder, understanding between you and your customers. If you use a customer agreement, here is a list of sample clauses to consider, including:

• Definition of the parties (define your status as an independent contractor if the contract is for a corporate organization);

• Services to be performed;

• Code of ethics of your professional association, if applicable;

• Confidentiality;

• Pricing and payment policies (pricing structure, retention guidelines, travel time or expenses, charges for supplies or products purchased on behalf of the customer, cancellation policy, payment due date, bad check fee, card acceptance credit, payment of expenses, etc.);

• Supply of materials, equipment and office space;

• Insurance coverage insurance;

• Governance of state law;

• Permission to take and use photos for marketing purposes, if applicable;

• Term of the contract / termination of the relationship

Now, forward with your shields raised!