Updated May 20, 2024
As a small business owner, safeguarding your venture is paramount, especially in the face of potential legal disputes that could jeopardize its existence. Lawsuits not only drain finances but also consume valuable time, diverting attention from essential operations. Therefore, understanding how to protect your business is crucial for long-term success.
In this article, we discuss vital strategies that promote legal protection for small business owners, helping you shield your company from unnecessary legal battles.
1. Form the right business entity in the right way
First things first. Learn the legal requirements for setting up a business, which immediately impacts liability protection. Plus, there are specific legal issues for startups to consider. Then choose the right business entity for your enterprise. Our business entity comparison can help you make that choice:
- Sole proprietorship: If you start a business and do not file with the state to establish an entity type, you are considered a sole proprietor. A sole proprietorship does not provide legal liability protection from business debts and actions.
- Corporation: Corporations are legal entities separate from the business owner and can protect the owner’s personal assets if the corporation is sued.
- Limited liability company (LLC): An LLC protects personal assets from business debt while offering simplicity in management and flexibility in taxation.
2. Put it in writing
Handshake agreements will not cut it in business. Put every business agreement into a written document that is signed by all parties involved. These documents, generally, fall into one of the following categories:
- Contracts: Whether you’re hiring employee or purchasing equipment, correct preparation and execution of contracts is critical. Contract pitfalls to avoid include failure to clearly define rights and responsibilities, omission of dispute resolution clauses, termination clauses and default clauses.
- Nondisclosure agreements (NDA): The purpose of an NDA is to create a confidential relationship that protects sensitive information. Say you come up with an idea that you are pitching to investors. Failure to protect this idea with an NDA puts it at risk of being stolen, which can lead to a costly courtroom situation.
- Non-compete agreements: A non-compete agreement prohibits a current or former employee from working for a competitor for a specified period of time after employment ends. Under this agreement, the employee must not reveal any trade secrets learned during employment.
3. Understand employment law
Your business must follow safety regulations and understand how to avoid unlawful termination. Violate these laws, and you can find yourself in costly litigation. Be sure to consult with an employment lawyer, who can guide you through this complex legal arena.
4. Protect your intellectual property
It is vital that you keep your intellectual property safe, or you can end up in court, yet again. IP issues include:
- Copyrights: Copyright laws are written to protect pieces of work and authorship. Not only do companies need to copyright their own materials, but they need to pay attention to what they use from someone else’s IP, like photos or videos.
- Patents: Patents don’t only protect your own innovations but can also help you avoid infringing on the patent rights of others.
- Trademarks: Protect your brand’s name, symbol, or logo with a trademark at the state and federal level.
- Trade secrets: As a small business owner, be aware of the information you share and with whom. This helps minimize the risk of misappropriation and is why NDA’s and non-competes are so important.
5. Get liability insurance
The minute you open your doors for business, you could be liable for workplace accidents, car accidents that happen on the way to work, and numerous other legal reasons to sue. Liability insurance can minimize lawsuits because there is available money to compensate for the losses.
6. Pay your taxes properly
Don’t pick a fight with Uncle Sam. Use the right tax forms and keep clear records so the IRS does not have a reason to pierce your business and go after your personal assets.
7. Take the next step
- Watch this video on how to receive the right level of legal assistance
- See what’s included in our small business legal plans
- Learn how the Corporate Transparency Act may impact a sole proprietorship
Frequently asked questions
Q. How do I protect myself from a lawsuit?
A. Choose the right business entity for your enterprise, which will shield your personal assets from business lawsuits. To help with that choice, consult with a business lawyer to learn how to protect your small business.
Q. What happens if someone sues your LLC?
A. Liability insurance offers all-around legal protection for small business owners and will minimize litigation risks because there is available money to pay for the losses.
Q. How can a small business avoid being sued?
A. If you’ve been wondering ‘how do I protect my company from a lawsuit?’, follow these seven steps to minimize liability: choose the right business entity for your enterprise and set it up the right way. Put everything in writing. Understand employment law. Protect your intellectual property. Get liability insurance. Pay your taxes properly. And get a good business lawyer.
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