By Cliff Ennico
www.succeedinginyourbusiness.com
Without a doubt, hands down, the most common question I get from new clients is: "Hey Cliff, I'm thinking of starting a business, but I'm afraid that if I make a mistake, someone is going to sue me. I will lose my house, and my spouse will divorce me and take the kids. How can I keep from getting sued when I run my own business?"
Just about every entrepreneur I come in contact with asks that question at some point. And if they don't, they really want to but are embarrassed to come out and say it out loud.
So here's my answer, in two words:
you can't.
That's right. There is no magic bullet that will prevent people from suing you. If you foul up badly enough and the other person has tons of money and loves to sue people, you will be sued. America is a highly litigious country where everyone is entitled to their day in court. Anyone can sue anybody else for just about anything, and the risk of being sued is part of the joy of running your own business. You have to live with that. If you don't like that, go somewhere else where commercial disputes are resolved by kidnapping and shooting the offending party.
Having said that, there are some things you can do to keep the risk of lawsuits at a minimum - five things, in fact, that will probably reduce your risk of being sued by 95 percent or more. By doing as many of these as possible, you will be doing everything you possibly can to keep lawsuits at bay. Here they are:
(1) Form a Corporation or Limited Liability Company (LLC) for Your Business: By doing this, you put a "wall" up between your business assets (the stuff you use in your business) and your personal assets (everything else - your house, your cars, your kid's college tuition fund and so forth). With a corporation or LLC, if someone sues you, they can still get to your business assets, but your personal assets should be protected. Just be sure you treat the corporation or LLC with respect: do all the required paperwork, file your tax returns promptly, and make sure every customer, client and other potential troublemaker knows they are dealing with a corporation or LLC, not you individually.
Specifically, you should make sure that:
- your corporation or LLC name appears prominently on your business cards, letterhead, website, marketing materials and any other information about your business that you make public;
- your corporation or LLC has its own checking account, that all checks are made payable to the corporation or LLC (NEVER to you personally), and that you deposit all business checks in the corporation's or LLC's bank account; and
- be sure to include the corporation or LLC name and your official title when signing letters, checks, documents and anything else that may have legal effect - for example, "XYZ Corporation, by John Doe, its President".
(2) Get as Much Liability Insurance as You Can Afford: Even with a corporation or LLC, your business assets are still open to attack in a lawsuit. Also, having a corporation or LLC does not relieve you of personal liability for physical harm you cause other people. If you hit someone with your company car, both you and your corporation or LLC will be liable. So, you still need insurance.
There are two types of business liability insurance policies: "commercial liability" and "errors and omissions" (E&O for short).
Commercial liability coverage protects your business against lawsuits from people who suffer accidents or injuries on your property (think of it as "slip and fall" insurance). If you have a retail location or office space where you regularly see clients, you absolutely need commercial liability protection.
But what if you work out of your home and make it a point not to see clients there (a good idea, by the way)? If you work out of a home office, your homeowner's insurance probably will not protect you if a customer or client is injured on your premises. You will need to purchase a "home-based business rider" to your existing homeowner's insurance policy.
E&O coverage protects you from lawsuits arising out of your mistakes or breaches of contract (think of it as malpractice insurance for ordinary people) - for example, a construction contractor who uses substandard materials in building a house, a manufacturer who fails to deliver a key component on time for a client's product launch, or an information technology (IT) expert who accidentally downloads a computer virus to a customer's computer system.
Get as much liability coverage as you can afford - I usually recommend at least $1 million per occurrence and $3 million overall for my clients who have service businesses. The premiums are deductible, and you will sleep better at night.
(Watch for Part II after Thanksgiving)
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book and 15 other books. COPYRIGHT 2012 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.
