“YOU’VE BEEN SERVED” Some Pointers on Lowering Litigation Risk in Your Business

Those three words strike fear into the heart of any rational person. Being sued is not only a hassle, but it puts your hard-earned assets or business at risk. We live in a litigious society, however, and every business owner should think about the risk.

What are some of the best ways to handle the risk?

First, form a company that limits your personal liability to what you have invested in the business. The overwhelming entity of choice these days is a limited liability company — that is, LLC, but corporations still have their place as a business becomes larger.

But that is the first step. You must make sure that your entity and not you are doing business with your customers and suppliers. This typically involves making sure contracts are in the name of the entity, but you should also try to avoid giving personal guaranties on those contracts.

A limited liability company also involves keeping up company formalities and keeping the entity in good standing with the relevant state authorities. The formalities may be required by law or by lenders or investors in your business. If you don’t keep up the formalities required by law, you could still be personally liable on company debts.

Second, keep your business assets separate from your personal assets — that is, create financial silos for different aspects of your life. As implied above, forming the LLC or corporation is the first step. You must maintain separate bank accounts and formally declare dividends when taking money from the corporate account to pay for personal expenses. Likewise, investing personal money in the business should be documented as a capital increase or a loan.

Third, get liability insurance. Not every matter that could turn into a lawsuit can be insured against, but it is silly to ignore those risks that can be insured. While your limited liability company should protect your assets outside the business, it will not protect your assets if you commit a tort. For instance, what if a visitor to your office or premises is injured — A court could determine that you were negligent for not fixing a defect that might have caused the injury. That determination is not insulated by your company’s limited liability.

Fourth, take a proactive stand early on when a customer or supplier has an issue. Addressing the issue early can most times let the customer or supplier know you are doing everything possible to resolve the issue, and this itself often avoids being sued.

None of these will absolutely shield you from the risk of being sued. But, doing them may well solve your issues on this point and not doing them only invites trouble down the road.