Small businesses tend to focus on sales and cash flow. Lawsuits are, unfortunately, very common. And a lawsuit could wipe out a small business since legal fees can approach a hundred thousand dollars while judgments could be even higher. Here are a few tips on how to protect your small business from lawsuits. We’ll also discuss options for preventing a lawsuit from destroying your business.

Put It in Writing

If you don’t put it in writing, you leave open the door to a lawsuit because of misunderstandings or unrealistic expectations. Create a written document for the most important terms of every transaction such as the price, scope of work, delivery dates and services to be provided. You may not want a long, formal contract for every transaction, but there needs to be a formal record of what was paid for a specified service or product. When someone wants to alter the scope of work, document it. The paperwork provides evidence as to what each party agreed to, and your best defense is that you did what you said would when you said you would. You should take care to back-up your files so that you don’t lose these critical documents.

Have Standard Policies and Procedures

Standard policies and procedures protect your business in a number of ways. Formal processes on how to draft contracts, sign up customers, ship products or handle refunds avoid charges of favoritism. They also reduce the risk of mistakes or potential fraud.

This concept needs to apply to Human Resources issues, as well. Have formal processes for hiring, giving performance reviews, and firing. Set formal policies for determining work schedules, recording time worked and determining pay rates. Furthermore, these procedures should be reviewed by a labor law expert. If you accidentally violate laws on workplace harassment, wage laws or discrimination laws, you could be hit with an expensive lawsuit. Conversely, having a written employee handbook that details the rules your employees must follow and set procedures for enforcing these rules can protect you from lawsuits.

Separate Yourself from Your Business

You want to separate yourself legally from your business. For example, set up a limited liability company or incorporate the firm instead of setting up a sole proprietorship where you are your business. This is not going to protect your business from being sued. Instead, it protects you personally if your business is sued. Your home and other assets aren’t on the line if someone sues your business for all it is worth.

Have General Liability Insurance

You cannot assume that property insurance, car insurance, and worker’s compensation insurance are going to cover every potential lawsuit. General liability insurance for small business provides protection from a variety of claims that aren’t covered by these other types of insurance. For example, general liability insurance is the only insurance that will kick in when a customer is injured on your premises or your defective product injured someone. Only general liability insurance will cover lawsuits regarding omissions and errors by a team member delivering service or an intellectual property dispute.

A side benefit of having business liability insurance is that insurers will provide advice on how your business can change its contractors or its procedures to reduce the overall risk of being sued. For them, it is simply risk management.

One point in favor of having good general liability insurance is that it may open up business opportunities for you. Some customers may require you to have a particular level of liability insurance before you can work for them.

Connect with an Experienced Business Lawyer

You probably know that you need to hire an experienced business lawyer when you’re sued. However, this relationship can save you from being sued. Have a legal expert you can call to ask for advice when you need it so that you can prevent issues from landing you in court later.

Be Careful with What You Say and Do

Avoid making public announcements unless they’ve been vetted by a legal expert and public relations professional. This should be equally true for formal press releases as social media posts. Avoid saying anything that is libelous or slanderous. A good rule of thumb is not doing business with unscrupulous individuals and firms. If they have shoddy business practices, you risk being associated with them or sued along with them by their customers.

Try to avoid conflicts of interest, as well. A business owner sitting on a government board that rules in favor of your business can get sued for that conflict of interest.


Running a small business always involves risk, but you can take steps to mitigate it. And this includes the risk of being sued and the possibility of your firm being wiped out by a lawsuit.