Small business entrepreneurs aren’t unfamiliar with the concept of risk management. Unpredictability is inherent in the process of starting and running a small business. It is possible to be caught off guard by unanticipated challenges despite your best attempts to stay on top of your marketing, sales, and cash flow. You’ve been through a lot, and you’ve come out of it stronger than you were before. But are you prepared for the financial repercussions of a lawsuit, let alone the psychological and emotional toll it would have on you?
In accordance with the statistics, you ought to be. In any given year, approximately half of all small firms are either involved in or threatened with litigation. Lawsuits are a necessary part of conducting business for huge firms with the resources to retain in-house legal counsel. A lawsuit, on the other hand, could force a small business out of business.
- 1 Small Businesses Bear a Disproportionate Litigation Burden
- 2 Why Small Businesses Get Sued
- 3 Business Lawsuit Protections
Small Businesses Bear a Disproportionate Litigation Burden
According to a survey conducted by the Small Business Administration (SBA), between 36 and 53 percent of small businesses are involved in civil litigation each year on average. According to the Institute for Legal Reform, the cost to firms resulting from litigation climbed from $300 billion in 2016 to $343 billion in 2018. (ILR). In addition, the ILR discovered that smaller enterprises have a higher liability burden than larger corporations. Enterprises with less than $1 million in annual revenue were responsible for 39 percent of liability costs, compared to businesses with more than $50 million in annual revenue, which were responsible for 37 percent of liability costs. For small firms, despite the fact that their overall percentage is similar to larger businesses, the expense burden of litigation is 10 times more per dollar of sales than that of larger businesses.
Why Small Businesses Get Sued
Lawsuits filed against small businesses can be made for a variety of reasons, including breach of contract, personal injury, civil rights violations, and unpaid wages. A typical conflict falls into one of three categories: consumer complaints, employee complaints, and complaints against other businesses.
Disputes with Customers
Dealing with dissatisfied consumers is not a new experience for small business owners. Nonetheless, in some cases, a minor disagreement can escalate into a formal legal dispute:
- When a state or federal legislation, such as the Americans with Disabilities Act, is violated, discrimination can occur (ADA)
- Refusal to provide service
- An incident involving a personal injury that occurred on the company’s property
Even while over 80 percent of small firms have no employees, the remaining 20 percent employ nearly 60 million Americans, accounting for nearly half of the country’s total labor force. The following categories of concerns frequently arise in legal conflicts between employers and employees:
- Wage and hour violations are a serious problem.
- Employee harassment in the workplace or a hostile workplace environment
- Violations of anti-discrimination legislation in the workplace
- Termination without cause
- Compensation for injured workers
Disputes in the Business World
Small businesses rely on the support of other businesses at all levels of the supply chain. This can result in disagreements on a wide range of problems, including the following:
- Breach of contract is a legal term (for example, nonconforming goods, overcharging, or reneging on a distribution deal)
- Intellectual property issues, such as copyright infringement
Business Lawsuit Protections
We have a well-earned reputation as a litigious society in the United States. The United States has the most expensive legal system in the world when measured as a proportion of its total economic output (GDP). In accordance with the ILR data, small enterprises who can least afford litigation costs are the ones that pay the most in damages.
Not all litigation is based on a baseless claim. Nonetheless, a lawsuit, whether or not it is warranted, has the potential to destroy your small business completely and irreparably. You may protect yourself and your company against the ever-present potential of legal action by following the procedures outlined below:
Select the most appropriate business structure
A sole proprietorship is the simplest business form, but it does not distinguish between your personal assets and your business assets, which means that your house, personal bank accounts, and other non-business assets could be at danger in the event of a lawsuit involving your firm. Organize your company as a C corporation, S corporation, or limited liability company to protect your personal assets.
Insure your company’s assets
Your company is most likely covered by general liability insurance, which protects you against claims arising from slip-and-fall incidents and other injuries. You may not be as effectively protected against claims of breach of contract or claims of discrimination, harassment, retaliation, or wrongful termination as you should be under certain circumstances. Maintain complete and accurate coverage for the full spectrum of business lawsuit risks in your insurance portfolio.
Contracts should be used
Despite the fact that handshake deals and verbal agreements may be legally binding, they may not be effective in the event of a business disagreement. Ensure that all of your transactions with other firms and customers are documented in written, legally enforceable contracts that have been drafted by—or have been verified by—your legal counsel before proceeding.
Educate your employees
Human resources rules are useful for directing internal behavior and providing excellent customer service, but training and education are required to ensure that those policies are enforced effectively. Make certain that everyone who works for your company understands what constitutes appropriate behavior and what does not.
Keep your data secure
Organizations are obligated to maintain records of some employee data, and the information you collect from customers can be a game changer in terms of marketing. You could be sued if there is a data breach because criminals are also interested in this information.
Foster open conversation
It is the responsibility of the business owner to create an environment that encourages open communication between customers and employees. In certain cases, people believe that filing a lawsuit is the only option to get their complaints addressed. If you are viewed as a person with whom others can communicate openly and honestly, you may be able to address issues before they escalate to the point of requiring legal action against you.