Small business owners face many of the same legal issues as big corporations, but have a fraction of the resources to devote to them. Many times, a lawsuit could have been avoided, or substantially diminished, had the business employed a sound legal strategy at the outset.
There are three main steps that small business owners can employ to mitigate risk. They are:
1. Incorporate Your Small Business. Entrepreneurs may assume that the costs of setting up an entity outweigh the benefits. As a sole proprietor or general partner, you are personally liable for all business debts. Thus, when considering that not only everything you have worked for in your business, but also every single non-exempt personal asset you own is at risk, for most the benefits of forming and maintaining an entity will far outweigh the costs. Other benefits of incorporating include: 1) looking more professional 2) taking advantage of S Corporation status and 3) succession planning if the owner dies. Small business owners are encouraged to seek legal advice from a competent attorney to determine which entity is best for them.
2. Have Your Contracts Reviewed by an Attorney. Most businesses have a standard contract that they enter into with their customers such as a Services Agreement, Consulting Agreement, or Purchase Order. Important terms to consider in such agreements include: scope of work, payment terms, term and termination, warranties (or disclaimers of same), indemnification, integration, choice of law, forum selection, and attorney fees. It may be tempting to “cut and paste” a contract from the internet or from another business. Be careful here! First, you don’t know if this contract was written in accordance with the most recent developments in YOUR states’ law. Second, you may be unintentionally including terms in your contract that you did not intend to include! For example, if the template you used offers a six-month warranty, and you did not intend offer a warranty at all. It is important to realize, that under Texas law, a party is presumed to have read and understood a contract that they sign. Again, there is no one size fits all, and the small business owner who invests in a carefully drafted contract specific to their business may save ten-times that amount in attorney fees if an unhappy customer sues them.
3. Maintain Adequate Insurance. There are many different types and amounts of insurance coverage available to small business owners. Small business owners are encouraged to reach out to a licensed insurance agent to discuss the risks faced by their business and discuss appropriate policies to provide coverage in the event of a claim. Many policies include coverage for defense costs, which means that if a small business is sued for a covered claim, the insurance company will cover the costs of defending the case. This coverage can be invaluable to a small business, where the costs of litigation can quickly exceed the amount claimed.
This article is for informational purposes only and does not constitute legal or tax advice. Please seek advice of a licensed attorney before making any legal decisions
Leigh K. Freeman Leigh K. Freeman is a business law attorney, entrepreneur, wife and mom in The Woodlands, Texas. Copyright 2021, Leigh K. Freeman attorney at law.
