By: Robert J. Uhorchuk
There is, unfortunately, a high cost to litigation for any size business, and in some cases, there is significant financial exposure, depending on the type of lawsuit, facts, and circumstances of the case, and the damages or claims asserted. To help avoid the high cost of litigation and the exposure of being involved in a lawsuit, there are proactive practices that any business can implement, especially small businesses or proprietorships.
1. Form and Operate Your Business through the Appropriate Legal Entity.
There are various ways or types of entities through which to operate a business including a proprietorship, corporation, s-corporation, partnership, limited liability company, and other such variations. Operating your business through the appropriate entity may provide for limited personal liability should litigation or a lawsuit arise against the business, and there are also important tax considerations to review, as well.
Particularly with regard to small businesses, operating as a proprietorship may not be the right answer and it is relatively inexpensive to form or organize a corporation or limited liability company through which you can operate the business as an alternative.
2. Review and Obtain Appropriate Insurance Coverage.
After you determine the appropriate legal entity for the operation of your business, one of the next practical steps is obtaining the appropriate insurance policies and coverages and reviewing those policies and coverages on a regular basis. You should develop a close relationship with your insurance agent, and seek legal counsel as well, to determine some of the insurance policies and coverages that you need to consider.
These include a general liability policy, property and casualty coverage, errors and omissions coverage, employment practices, and workers’ compensation, along with “key man” life insurance for the business or a personal umbrella policy for any of the owners or proprietors in the business. Depending on your business and industry, there also may be specialty policies and coverages for you to consider.
In short, obtaining and maintaining the appropriate insurance policies and coverages is one of the best practices to implement to protect you and your business from the potentially high cost of litigation and the expenses that mount as a result of a lawsuit.
3. Retain and Maintain a Roster of Outside Professionals.
Along with maintaining a good relationship with your insurance agent as discussed above, it is prudent for any business to maintain and have an ongoing relationship with outside professionals including an attorney or outside general counsel, and a tax professional or CPA. These professionals should be retained and involved from the inception of the business to provide advice with regard to your legal entity for operation, your insurance coverages or policies to consider, your service and vendor contracts to review, and your employment policies and practices, among many other considerations.
The nominal costs of involving these professionals on the front end on a proactive basis will undoubtedly help you and your business avoid or save costs, expenses, and exposures to litigation in the long run. The engagement of an outside general counsel or attorney and CPA or other professionals will allow you to anticipate and navigate business, legal and operational pitfalls before they occur, and certainly reduce the impact or expense should they occur, regardless.
4. Maintain and Keep Separate Business Records.
The type of legal entity you choose to operate your business may determine what and how you keep records. Maintaining separate financial accounts and records from that your personal accounts is usually always recommended. In addition, the simple fact that your business maintains regular corporate records or company records with key documents may very well help avoid expensive and time-consuming efforts in future litigation, along with helping you as the business owner avoid a personal liability attack or piercing the company or corporate veil issues that sometimes arise in litigation.
5. Hire Smart and Consider Any Necessary Employment Contracts.
For any business, it is important to have a high-quality filter in hiring, training, and managing your employees. The employees should be integrated into your business with processes and procedures to avoid or mitigate the risk and exposure of lawsuits either from third parties or from employees themselves. Depending upon the type of business or industry, you should consider your position on initial employment agreements to include non-compete agreements, trade secrets, and proprietary property agreements, among others. Of course, in preparing and presenting any such agreements, you need to engage your line-up of outside professionals to include an outside general counsel or attorney.
6. Only Enter Into Agreements or Contracts with Mutual Benefit.
As a business owner and operator, there will be a multitude of vendor agreements, sales contracts, IT service agreements, leases, and many other contracts and agreements, depending on the trade and industry of your business. You should always have your outside general counsel, lawyer, and/or other outside professionals review such proposed agreements and contracts before you and your business enter into them. Don’t be afraid to make changes or revisions for your own interests. The review and revision of some of these agreements before you and your business enter into them may, in the long run, allow you or your business to avoid a lawsuit, or at the very least to reduce your potential exposure and expense in a lawsuit.
Taking and incorporating these proactive practices for your business should be part of your strategic and problem-solving planning for your business. In order to consider these practices and find the best solution, our firm can help guide you in making these decisions for your business. If you are ready to move forward, you are welcome to contact me for consultation at (423) 618-6800 or by email at [email protected].
This blog contains general information about legal matters. The information is not advice, and should not be treated as such. Communication of information by, in, to, or through this blog and your receipt or use of it: (1) is not provided in the course of and does not create or constitute an attorney-client relationship; (2) is not intended to convey or constitute legal advice; and (3) is not a substitute for obtaining legal advice from a qualified attorney.