Running your own business has its perks, but you’re also vulnerable to legal risks. Legal costs can add up quickly; in 2021, they cost small business owners $160 billion, according to the U.S. Chamber of Commerce Institute for Legal Reform.
Safeguarding your business against legal challenges is essential for sustainable growth and stability. Here are seven simple strategies every small business owner should consider.
1. Choose the correct business structure
The type of business entity you choose is important. It affects your ownership stake, how much you’ll pay in taxes and your level of personal liability if your business gets sued. If you’re set up as a sole proprietorship, for example, you’re exposed to unlimited personal liability. That means your personal assets could be at risk if you’re involved in a lawsuit.
If you opt for any of the following business structures, you’re not personally liable:
- Limited partnership or limited liability partnership
- Limited liability company (LLC)
- C corporation
- S corporation
- B corporation
- Nonprofit corporation
The right one for you will depend on the size of your business and your preferred tax structure. It’s also possible to change your business entity, even if you’re already up and running.
2. Comply with federal and state regulations
One of the best ways to avoid lawsuits is to stay compliant with federal and state business laws. That includes the following steps, according to the U.S. Small Business Administration (SBA):
- Follow your business structure requirements: Corporations are the strictest and require initial and annual shareholder and director meetings, among other requirements. LLCs, on the other hand, are more lax.
- Keep up with state filing requirements: What’s required will depend on the way your business is structured. Most states require an annual report or biennial statement, among other documents.
- Stay on top of federal requirements: That includes paying taxes, and some small businesses must offer health insurance to full-time employees and their dependents. You’ll also want to stay in compliance with copyright laws, marketing and advertising laws, workplace health and safety laws and other federal regulations.
- Keep all permits, licenses and certifications current: What you need will depend on the type of business you have and where it’s located.
3. Find a trusted attorney
Running a business can be overwhelming, especially if you’re in the early stages. A skilled business attorney can provide one-on-one guidance that’s tailored to you. According to legal site Nolo, they could:
- Help you choose the right business structure and form your business entity
- Check whether your desired business name is available in your state
- Offer day-to-day legal advice as you operate your business
Investing in this relationship could prevent future lawsuits and legal fees.
4. Carefully review every contract
Whether you’re drafting contracts for new clients or signing a contract provided by a vendor, you’ll want to review the terms carefully before making a commitment. (Consulting a business attorney can be helpful here.) Ensure that your contracts will protect you if the other party doesn’t live up to its end of the bargain. What’s expected of each party? And what will happen if there’s a conflict down the road?
5. Understand employment laws
Labor laws are designed to protect workers’ rights. Following them can set the stage for a positive work environment where employees feel safe and respected. It can also protect your business legally. According to the SBA, that includes understanding laws around hiring veterans, foreign workers and people with disabilities. You’ll also be expected to comply with laws concerning layoffs, downsizing and terminating employees.
The U.S. Department of Labor also has rules regarding:
- Wages and hours
- Workplace safety and health
- Workers’ compensation
- The Family and Medical Leave Act (FMLA)
6. Keep personal information safe
Data breaches are unfortunately all too common. Whether you’re storing sensitive employee information or personal customer data, keeping it safe is critical. The Federal Trade Commission (FTC) recommends building a strong data security plan that involves:
- Taking stock of the personal information you have, whether it’s digital or on paper
- Only keeping information that’s necessary for business
- Protecting the information you decide to keep
- Safely disposing of information you no longer need
- Planning ahead for potential security breaches
If your small business does experience a breach, the FTC suggests acting swiftly to fix the issues that caused the incident. Securing your systems can prevent further damage. It’s also wise to consult a legal professional who specializes in privacy and data security.
7. Invest in the right business insurance
As a business owner, carrying liability insurance can protect you in the event of a lawsuit. General liability insurance protects against bodily injury and property damage claims. Certain medical expenses are also included. That means your legal costs could be covered if your business is involved in a lawsuit. Without it, your personal assets may be at risk.