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PROTECT YOUR BUSINESS

Avoid Getting Sued: 8 Ways to Protect Your Small Business from Lawsuits

8-minute read

Chris Bousquet

8 July 2022

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Running your own business can expose you to so many new and exciting experiences. It can also expose you to risk and something that’s not so exciting — a business lawsuit.

Breach of contract with partners or suppliers. Discrimination against customers or employees. Personal injury suits from on-the-job accidents. Payment issues. If there’s a dispute stemming from your business, there’s the potential for getting sued.

That means an important part of running a successful business is not just pulling in revenue but also taking on the risk of a lawsuit, and putting measures in place to avoid that risk in the first place.

We’ll cover some common ways for you to do exactly that, including 8 steps you can take now to protect your business from a future lawsuit.

Let’s get going.

The Small Business Lawsuit Risk Is Real

The last thing you probably want to think about when running your own business is getting sued.

After all, your intentions are good. Your work ethic is solid. You provide a great product or service that you think customers will love. You genuinely care about the people you work with and hire. What could possibly go wrong?

Well, if you believe in statistics, it’s probably safe to say that if you can be sued, then there’s a chance you will be sued. No matter how frivolous the lawsuit.

According to this article, over 50% of all civil lawsuits target small businesses annually. And 75% fear being targeted by a frivolous lawsuit. Ninety percent of businesses are even willing to settle, simply to avoid higher court costs. It’s enough to not only knock the wind out of your sails but potentially sink your business altogether.

To help you navigate the waters, let’s look at some of the most common types of small business lawsuits out there and what you can do that can help to avoid them.

What Are the Most Common Types of Small Business Lawsuits?

If you’re among the 75% who fear the threat of a frivolous lawsuit, it’s good to know what are the most common types you’re likely to run into. Let’s look at those now.

1. Discrimination against customers or employees.

If your business refuses to serve a customer, sell them a product, or won’t hire a job candidate on the basis of their race, color, religion, sex, or any other state or federally protected class, it could be cause for getting sued.

2. Harassment.

You might think you treat all your employees and customers with respect. But one of your employees might not follow the same lead. Because they work for you, your business may be responsible for their actions and this could get you sued.

3. Breach of contract.

Does your business have contracts in place with partners and suppliers? If you do something that’s not in that contract, or fail to do something that is in the contract, you could be putting your business at risk for a lawsuit.

4. Accidents and injuries.

From slips and falls that can happen on almost any job site to food poisoning, if you run a catering business. All sorts of injuries from business-related accidents can be a lawsuit waiting to happen.

5. Payment disputes.

Your employees, or contractors if you work with them, might raise a payment dispute or other labor law violation that can be cause for legal action against your business.

How Can You Protect Yourself and Your Small Business from Lawsuits?

The good thing about knowing the most common reasons for a small business lawsuit? It can help you to take proper steps to minimize the risk of getting sued. Let’s look at those now:

1. Incorporate your business.

Registering your business as an LLC typically keeps your personal assets separate from business assets.

For example, let’s say you’re a plumber, and after doing a job for a customer, a pipe breaks and their basement floods, causing thousands of dollars in damage. They sue you and want you to pay to repair their basement and replace damaged furniture.

If your business is set up as a sole proprietorship and you didn’t have the funds in your business savings account, they could come after your personal assets. If it’s a particularly expensive lawsuit, your car or house may need to be offered as collateral to cover lawsuit expenses.

But if your small business is registered as an LLC, your personal assets are considered separate from your business assets and therefore generally cannot be touched.

2. Keep your employees safe.

Keeping employees safe is one of the most important things you can do as a small business owner. It’s good for them. It’s good for you.

When you promote a safe working environment, you’re generally better able to protect your employees from injuries and illness, which in turn minimizes the risk of a lawsuit.

But what are the specific risks and what can you do to avoid them? We’ve got you covered. Check out these 5 helpful steps that we created that can help you improve employee safety.

3. Get Liability Insurance.

Your vision for how to run a successful business may be perfectly clear. But what’s not so clear are the unavoidable accidents that could land a lawsuit in your lap. They could be the most random things.

For example, let’s say you have a window cleaning business and you’re at a customer’s home. Your hands are a little soapy and you accidentally drop your bucket. You try to catch it, but in the process, you break a window. And a nice clean one at that.

The homeowner could sue you for the damages, and you’d likely have to pay if you’re determined to be at fault. While a single window may not seem like a big deal, there are other potentially more costly risks out there. In fact, when it comes to small businesses, the average claim for customer injury or damage is $30,000.

Unless you have superhuman powers and can see into the future — and avoid the bad stuff — accidents like this could happen. They can happen to anyone in any kind of business at any time. So it’s usually wise to have liability insurance for extra protection.

Having general liability coverage could help to protect you if, for example, you damage someone’s property, or if a third party (e.g., customer or vendor) has an accident at your place of business. Professional liability coverage could help to protect you in the event a customer claims that you were negligent while working for them.

You may not need both types of coverage, but having business insurance can usually help pay the legal costs to defend yourself if a customer sues you.

That’s where we come in. At Simply Business, we’ve made finding and buying business insurance that’s right for you simple and easy.

To get a quote, it usually takes just under 10 minutes online, and we can take it from there. Or if you want to talk to a helpful human (one of our licensed insurance agents), you can give us a call at 844-654-7272.

We work with leading insurers to find coverage for your business at an affordable price. And we make it easy to understand what you’re getting and how much it costs.

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4. Follow the law.

This seems like an obvious one. But sometimes the obvious can be inadvertently overlooked. Take labor, for example. You’ve got an alphabet soup of labor law acronyms out there, including:

  • National Labor Relations Act (NLRA)
  • Family Medical Leave Act (FMLA)
  • Americans with Disabilities Act (ADA)
  • Title VII
  • Age Discrimination in Employment Act (ADEA)
  • And more

Along with employment laws, there are consumer laws and intellectual property laws to think about, among others. Seems like a lot to wrap your head around when all you’re trying to do is run a business, but you may still want to familiarize yourself with them.

Or at least talk with someone who can help to keep you compliant.

5. Hire a human resources consultant or attorney.

An experienced human resources (HR) consultant and/or an employment attorney can let you know which employment laws apply to you and help you create and enforce policies to help ensure you’re following the law.

It may be the last thing you want to spend money on when running a business, but let’s say you need to hire someone for your business. Or even worse, fire someone. An HR consultant or employment attorney can advise you on proper hiring and termination procedures.

That advice could save you from an expensive and emotionally draining lawsuit.

6. Use contracts.

“You have my word” might be the way you prefer doing business, but it may not be the wisest. Consider putting everything in writing. When you make deals without putting them in writing, you leave your business open to a possible dispute. It will also help you and your customers hold up each end of the agreement.

For example, say you have a landscaping business. For one of your new customers, you set up an every-other-week schedule that includes lawn mowing only. You tell them the price and they agree to it. Only, they heard you say that the price includes lawn mowing every week and fertilizing every five weeks.

That misunderstanding could open the door to a lawsuit. It’s best to put everything in writing. For every transaction, create a written document that specifies the most important terms of the deal, such as:

  • Price
  • Delivery dates
  • The service or products you’ll provide

It doesn’t always have to be a long, formal contract, but it should at least be an email or some other document that turns a verbal agreement into a written contract.

A business attorney can help explain how best to document your business terms and agreements. Or you may consider using an online legal service. Legal contract templates often can be found there at little cost to you.

Once the contract is in place, one of the better ways to avoid being sued is simply to follow it.

7. Communicate clearly and often.

The importance of clear communication applies not only to your employees but to your customers and suppliers as well. Sometimes things go wrong through no fault of your own. Supplies don't arrive on time. A project costs more than you expected. Or the project takes longer to complete than you originally estimated.

Keep in mind that people are apt to be more reasonable when you keep the lines of communication open and ongoing. When things don’t go according to plan, explain the issue to the people you're doing business with and work with them to find an acceptable solution.

If you communicate verbally, consider following up with an email so you'll have a written record of the discussion.

Addressing an issue before it manifests itself into something much larger can go a long way toward preventing a lawsuit.

You can check out some more helpful customer service tips.

8. Protect your data.

When It comes to cyberattacks, small businesses can be big targets. While large cyberattacks tend to grab a lot of headlines, it’s actually small businesses that are more at risk.

Many small businesses don’t have the IT resources and sophisticated cyber defenses of larger companies. Even if they did, prevention isn’t always perfect. One successful attack can cause thousands of dollars not only in claims but also spending time and resources notifying people, detecting the problem, and fixing it.

Having cyber insurance can help cover many of those costs (up to your policy limits), helping your small business recover from an event that can often be crippling.

Bottom Line: Protect Your Small Business from Lawsuits.

Running your own small business has its rewards. But it can carry big risks. And while you can’t prepare for every situation, there are actions you can take to limit your exposure.

Hopefully after reading this article you have a better idea of what the most common types of small business lawsuits are — and what you can do to avoid and prepare for them.

Still at the end of the day, even with all the preparation in the world, accidents could still happen. Which is why you should consider business insurance. It won’t prevent a lawsuit, but it can lessen the worry, stress, and financial impact that can come with one.

Written by

Chris Bousquet

I went to college to be an accountant and graduated with a degree in creative writing. Words won out over numbers, but barely. All credit goes to my parents. Had they talked about anything other than banking at the dinner table growing up—and had they never bribed me with Pop-Tarts to read books, play with my Matchbox cars and quietly exercise my imagination—who knows where my left and right brain would be today.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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