Protect Your Small Business From Legal Exposure
(4 minute read)
Building a small business demands the sacrifice of time, money, energy, relationships, hobbies, weekends, sleep, etc. Unfortunately, the fruits of those sacrifices can be severely compromised, or even destroyed, by legal problems. To the degree possible, minimize exposing your small business to legal risks. While it is virtually impossible to make your business enterprise entirely immune from liability, there are some fundamental steps and practices you can incorporate to significantly reduce the likelihood of legal exposure. Below is a list of several items which can serve to reduce your risk. This list is not intended to be comprehensive in nature and scope. Moreover, each small business carries its own unique legal risks and perils as a function of the market in which it finds itself and the nature of the services it provides. If you are a small business owner, solopreneur, or self-employed, the wisest thing you can do is find a competent, experienced business lawyer and spend a few hours consulting with him or her to consider proactive steps to insulate your business entity from unnecessary legal risks.
1) Formation Of Business Structure. Take formal steps to create the specific business structure that best suits your business entity for tax purposes and also serves to minimize or eliminate the risk of exposing your personal assets to liability forfeiture, such as an LLC, S-Corp, C-Corp, Sole Proprietorship, Nonprofit, etc. Do not form the business structure until you have done your homework.
2) Obtain a Business License. If your industry requires a business license, this is non-negotiable, secure it. Failure to do so will eventually be fatal to your business.
3) Obtain a Business Permit You will be required to secure a business permit from the locality/municipality in which your business is located. Again, non-negotiable.
4) Secure Federal Tax Identification Number (EIN) You are going to pay taxes, or at very least file a federal tax return, so secure your EIN.
5) Obtain State Tax Identification If your state requires tax identification, then submit the application.
6) Report Beneficial Ownership Information As of January 1, 2024, business entities must report to the Treasury Department who owns and controls them.
7) Pay Taxes The IRS is now bigger than ever. Don't do anything to invite an audit. Hopefully this goes without saying, but you would be surprised….
8) Secure Insurance Sit down with an experienced insurance agent you trust and review the nature of your specific business risks. Secure what you need by way of insurance policies: general liability, product liability, property, owners and operators, workers compensation, etc., and then make an annual habit of reviewing your existing policies and their limits of liability to meet the demands of your evolving business.
9) Know Legal Risks Specific to Industry Each industry carries its own risks. Know them, research them, consult with experienced professionals in your industry and learn from their wisdom and insight to identify and mitigate against the risks that tend to manifest. If an experienced professional in your industry warns you about a specific legal risk, it would be foolish to assume it will never happen to you.
10) Open a Business Bank Account Open a bank account dedicated exclusively to your business enterprise and do not use it for anything else.
11) Maintain Accurate Records Incorporate an internal business documentation system that works for you (files, folders, envelopes, electronic scanning, hard copies, photocopies, etc.) which fosters the maintaining of accurate business records and make it a routine habit. Be consistent, accurate and organized.
12) Compliance 99% of the battle is won if the business culture you create is compliant. Embrace customs, practices and habits which foster compliance with both the law and the industry standards that govern your business. This type of discipline tends to pay big dividends. Educate your employees, agents and contractors in your compliance standards. If they refuse to be compliant, they are exposing your business to risk unnecessarily.
13) Written Contracts Only If you are obligating yourself, or others, to comply with business terms and conditions, make sure those terms, conditions and remedies are in writing. If your business agreements are verbal, it is only a matter of time before they are breached.
14) Non-Disclosure Agreements If you are disclosing your business secrets or proprietary information to others, make sure they sign a nondisclosure agreement to prevent getting burned. Ideas, client lists and proprietary information are frequently stolen. If you sign a non-disclosure agreement be prepared to honor it or you could owe monetary damages.
15) Protect Your Creative Work/Intellectual Property If you have valuable, creative work product or intellectual property that you want to protect, you should hire an IP attorney and take the necessary steps to safeguard against theft. The earlier the better.
16) Don’t Falsely Advertise Be very careful about the representations you make to the public. Don’t promise a product, service, warranty or price unless you can deliver. And do not bait and switch. If you do, someone will eventually call you on it. It is an actionable lawsuit.
17) Honor Your Warranties If you offer a warranty to the public, honor it. Failure to do so is an actionable lawsuit.
18) Be Careful About Bad Mouthing Competition It's one thing to extol the virtues of your own products or services, but it is altogether different, and very unwise, to make false representations or defamatory statements about your competitors. If you make false statements about your competition it is an actionable lawsuit.
19) Do Not Mix Personal & Business Assets Avoid mixing your personal and business finances. The commingling of finances will result in muddled, inaccurate bookkeeping and may deprive you of crucial tax deductions. It could also compel the IRS to re-classify your business as a hobby.
20) Do Not Violate Others’ Intellectual Property Rights If in doubt as to whether you are potentially violating the intellectual property rights of others, seek out the immediate advice of a qualified IP attorney. This mistake could be very costly.
21) Understand Labor Laws/Employees vs Independent Contractors If you employ others, they have rights. You need to know your obligations. Also, do not attempt to disguise a rank employee as an independent contractor for tax purposes, or for any other purpose.
22) ADR Resolution If you find yourself engaged in a legal dispute, it may be wise to explore alternative dispute resolution (ADR) which tends to be cheaper, quicker and less punitive. At very least, it is worth weighing the risks and benefits of ADR before plunging into traditional court based litigation.
23) Avoid Debt As obvious as this sounds, it is worth reminding you that while debt may initially be considered a financial issue, it can quickly become a legal issue if you are unable, or unwilling, to meet your financial obligations.
24) Consult Professionals If an esoteric or industry specific issue arises, which potentially places your business at risk or in legal peril, the time and money spent consulting with a qualified professional to further insulate your business from harm will very likely be worth the investment.
25) Attorney On Retainer In the event you do encounter legal problems, time may be of the essence. Sometimes you only have 20 days after being served with a Complaint, to formally respond in writing, or judgment may be entered against you. For this reason, it is wise to perform your due diligence well in advance and establish a pre-existing relationship with an experienced, competent attorney to serve as an initial point of contact should a legal issue arise.
Let's do this!
The information provided on this website does not and is not intended to constitute legal advice. All information and content on this site are for general informational purposes. Readers of this website should consult their own attorney to obtain specific advice with respect to any legal matter.
