How to Get Sued!

If you are in business, you should be thinking about the risks involved. Here are some common pitfalls that lead to liability and lawsuits for small business owners and how to avoid them.

Do business as a sole proprietor
When people do business as a sole proprietor this means they are doing business as an individual. There is no asset protection and it also offers poor tax benefits. If the business is sued all of your personal assets are at risk. You should form a corporation. If properly maintained, the corporation will shield your personal assets if the business is sued or goes bankrupt.

Do business as a general partnership
A partnership is formed when two or more people do business together for profit. This is worse than doing business as a sole proprietor. If a partner does something foolish, you are liable. If you are going to have partners, then consider a corporation or limited liability entity.

Use a corporation improperly
A corporation is good only if you use it properly. Many people pay an attorney up to 1k to setup a corporation, and then they take the minute's book and stick it on the shelf. A corporation will not shield you from personal liability if you don't follow corporate formalities. Have your attorney or tax advisor review your corporate records and practices.

Personal Guarantees
In some situations it is necessary to sign personally, such as bank loan or line of credit. But, don't give a personal guarantee in every situation just because they ask it. Some vendors will ask you to sign a personal guarantee of a corporate liability. If they are not extending you credit, you should refuse.

Failure to maintain adequate insurance
Insurance will protect you in most cases. Don't be cheap. If you keep the minimum insurance, increase the liability limits. You can double your liability insurance for a small amount. Remember, if your insurance is not adequate to cover a claim, the injured party can go after your personal or unincorporated business assets for the difference. Insurance also gives you an attorney in an event you are sued, even if the lawsuit is completely bogus. This will save you thousands of dollars.

Sexual harassment in the workplace
Sexual harassment is another hot issue. If you own a company with employees, then be aware of what goes on. Even if you don't engage in any bad conduct, your company can be sued if your company permits a hostile environment. Make sure you have written policies that are given to all of your employees that states what behaviors will not be tolerated.

Using independent contractors
If you use contract employees, you might be treading on thin ice. If they commit a negligent act and a third party is injured, you can be held liable.

Failure to get it in writing
Always get things in writing. Whenever you speak with someone at a company, the IRS, or any governmental organization, get it in writing. If they don�t give it to you in writing, then send them a follow up letter summarizing your conversation. If they fail to object to its contents it may be deemed an admission of what the letter states. Keep a copy in your file. The written word is your most powerful weapon in court.

Opening you mouth too wide
Thing before you act if you are involved in what could be a potential lawsuit. Do not write offensive letters to your adversary stating your legal positions.

Owning all of your assets in one business entity
If your business entity has a substantial amount of debt free equipment or real estate, consider spreading out the risk. Create one or more corporations or limited partnerships to hold title to the assets, and then have your business lease the assets back.

"Own nothing, but control everything." John D. Rockefeller. The more assets your business owns, the more likely it will be sued.

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