Six Ways to Protect Your Small Business from Legal Trouble

We’ve all heard the statistics on how many small businesses fail. Competent management and understanding of your market can save you from the most common pitfalls. But what about legal trouble? A lawsuit can crush even the most prosperous small business, and yet many business owners find themselves unprepared for the possibility. Here are a few ways you can keep legal trouble from endangering your small business.

1. Protect Your Reputation

This one seems obvious, and yet so many small business owners don’t heed the warning: be careful what you say and do online! Social media has become a cornerstone of doing business, but you can still find hundreds of horror stories about business owners who have unleashed bad behavior on customers or critics — and suffered the consequences. Use social media responsibly. Keep your tone inviting and civil. Don’t overreact to criticism or shut down conversation — that will often make things worse. Hire or assign a trusted representative to act as your social media “voice” and have a plan in place to establish and protect your online reputation.

2. Incorporate Yourself

Many business owners operate as sole proprietorships. While this is one of the easiest and least expensive paths to starting a small business, it also carries serious financial risks. If a company in sole proprietorship is sued, the owner’s personal assets could easily be lost in the resulting settlement or judgment. That’s why incorporating is a good idea. Establishing your small business as an LLC or putting your business in the hands of a trust will protect your personal assets. If the worst should happen and your business goes under, your life won’t go with it.

3. Avoid Suspicious Situations

Avoiding conflicts of interest and suspicious employees might also seem self-evident… and yet many small business owners fall prey to unscrupulous employees, contractors, or even clients. Do your research. When hiring employees, conduct background checks and perform screening. Audit your finances quarterly. Require your clients and customers pay you in a timely fashion, and get all your contracts in writing. When tax time comes, make sure to hire a tax attorney or financial advisor to take care of your books. You’ll not only avoid trouble, but could also save money by taking advantage of hidden tax breaks.

4. Get Protected

First and foremost, your business should absolutely have liability insurance, in case of injury or other employee mishap. Business owners might also consider taking out errors and omissions coverage, which will cover the business in case a client accuses you of error or breach of contract. Another good way to cover your legal bases is to build protection into your contracts and make sure you’re not liable for circumstances beyond your control. You should also get a quote for umbrella coverage. Another reason to have the number of a good lawyer!

5. Stay Vigilant

When protecting your business from legal trouble, the best approach is to be prepared. Back up crucial client data, so you don’t end up like that fellow who deleted his entire business. Monitor your finances and infrastructure regularly. Keep your security up to date to avoid losing data to viruses or malware. Loss of key client data or productivity doesn’t just cost money and time — it can also open you up to possible legal action. Don’t take any chances.

Not every entrepreneur will see legal trouble coming, but every entrepreneur should be prepared. Staying current on business trends and developing a plan for how