Wolf A few days ago Brian Honnold had an excellent post about the fear of lawsuits by America’s small businesses over on IowaBiz.com.  The most alarming statistic?  Small businesses bear 69% of the total cost of the tort system to all U.S. businesses.  That’s $98 billion a year in costs.  Further, six in ten small business owners feel constrained when making business decisions because of the fear of lawsuits.

So what’s the solution?

Many call for legal reform.  That’s what the Institute for Legal Reform is all about. But is it really working?  Despite millions of dollars poured into extensive campaigns, it is apparent our nation’s small businesses do not feel any safer.

Should we kill all the lawyers?  Wait . . . I shouldn’t have said that.  I am a lawyer.

The best protection for small businesses is to build a solid foundation.  A house of bricks rather than one of straw or sticks.  As Brian discussed, insurance is a component in building that solid foundation but other protections are necessary.

Here are five suggestions on how to protect yourself from lawsuits:

  1. Use written agreements.  Unfortunately the day is over when you could rely on a handshake.  Make sure that your agreements are comprehensive.  The agreements should always set forth the rights and responsibilities of the parties in detail.  It is a good idea to have your written agreements drafted and/or reviewed by a business attorney.
  2. Have a comprehensive employee manual.  Employee lawsuits are on the rise and a major distraction for your business.  A written employee handbook affords you a better opportunity to avoid misunderstandings that can lead to litigation.  Disputes are are less likely to occur when your employees know the rules.  Keep in mind that a well-written employee handbook can help your business but a poorly written handbook can cause even more problems for your business.  Don’t pull a template from the Internet without consulting an employment lawyer.
  3. Maintain your corporate or other limited liability structure.  Make sure to keep your personal guarantees to a minimum, stay current with corporate records, pay your applicable taxes and do not mix your personal assets with your business assets.
  4. Protect your intellectual property.  Consider obtaining trademarks, copyrights and patents as applicable.  Consult an intellectual property lawyer in order to protect yourself against infringers.  Likewise, avoid infringing someone else’s intellectual property.  Before deciding on a business or product name you should check to see if the name is trademarked by someone else.  Similarly, be careful not to steal copyrighted materials for your own use.
  5. Consider alternative dispute resolution.  Mediation is often an efficient way to resolve business disputes.  It is a process in which the parties to a dispute, with the assistance of a neutral third party (the mediator), identify disputed issues, develop options, consider alternatives and work to reach an agreement. There is a time to go to court but consider the costs of the litigation before making that decision.  Approach the decision of whether to litigate in a business-like-manner rather than emotionally.

Be proactive.  Don’t wait for the wolf to knock on your door before you protect yourself.

P.S. I wrote this post originally for IowaBiz.com.  The blog sponsor, Professional Solutions Insurance Services, and its parent company, NCMIC, had a nice write up in the Des Moines Business Record this week. 

Photo by Laenulfean on Flickr.