Protect your business: How to avoid a lawsuit or getting sued

The dream of owning and operating a small business can become a nightmare if you're hit with a lawsuit. Of all the tasks you take on to protect your business investment, NEXT says knowing how to avoid a lawsuit and what to do if you get sued are essential business skills for stability and growth.

Businesses spend an average of $1.2 million annually fighting litigation, according to the U.S. Chamber of Commerce. Education and preparation could help your small business avoid some of the financial losses — and stress — of a lawsuit.

What’s the difference between a claim and a lawsuit?

A claim is a demand made against another party for compensation for damages. While a claim can be made against any individual or business, they're usually handled by lawyers or insurance companies.

If they can’t work out an agreement or settlement that satisfies all parties, it’s possible for a claim to lead to a lawsuit.

A lawsuit is a formal legal dispute that gets decided on in court.

6 examples of common business lawsuits

The most common reasons for business lawsuits include:

1. Employee or customer discrimination. If a business refuses to serve a customer or hire a job candidate based on protected classes (such as gender, race or religion), they can be sued.
2. Workplace harassment. This is defined as unwelcome conduct based on protected classes.
3. Breach of contract. If you fail to meet obligations and promises to partners or vendors, you risk getting sued.
4. Accidents, injuries and property damage. This could include slip-and-fall accidents or damaging someone else's belongings.
5. Payment disputes. If you're not paying employees or vendors what you promised, they could take you to court.
6. Wrongful termination. An employee believes they were fired illegally.

How to protect your business from lawsuits: 4 tips for prevention

No business expects to be sued, but preparing ahead is never a bad idea. These four tips could help protect your business.

1. Separate your personal assets from your business assets

If you're an entrepreneur whose business structure is set up as a sole proprietorship, you could consider incorporating as a limited liability company (LLC). That creates a legal separation between your business and your personal assets, such as bank accounts or your home, if you are sued.

Learn more: How to change from sole proprietorship to LLC (and 3 signs you should)

2. Get insurance coverage

Business insurance is common in most professions because it transfers some risk to the insurance company. For instance, consultants and accountants could be accused of a professional mistake that causes a financial loss. Without liability insurance, they would be fully responsible for the costs associated with claims and lawsuits.

General liability insurance may cover the cost of the lawsuits over a wide range of incidents like advertising harm, personal injury, damage to other people's property and bodily injury. It could also cover attorney fees, some courtroom costs and settlement costs up to the policy limits.

Depending on the nature of your business, you may require more specialized insurance. This might include professional liability insurance (also called errors and omissions insurance, or E&O), workers' compensation insurance, commercial auto insurance or other coverage.

Start a conversation with a small business insurance provider to learn what kind of protection will best suit your needs.

3. Keep organized and accurate records

Good recordkeeping can be a business lifesaver. Organized signed agreements, emails, notes from phone calls and meetings and more can help resolve disputes and clarify details of business transactions before a claim is filed.

Accurate records provide a paper trail of how a conflict may have escalated and the steps you took to resolve the problem. If you're sued, your lawyer will want to see these records. Consider setting up a document management system to help you stay organized.

4. Find legal counsel before you need them

Familiarize yourself with a qualified and experienced lawyer in small business lawsuits — ideally, someone familiar with your industry.

If you’re scrambling to find a lawyer after you’ve already been sued, it can be difficult to find one who best fits your needs. That’s why many small businesses keep a lawyer on retainer.

Aside from helping you in the event of a lawsuit, a business or employment lawyer can give you legal advice on hiring employees, staying in compliance and reviewing important documents.

What to do if your small business gets sued

Getting sued is both stressful and time-consuming. But with the right kind of preparation, it doesn’t have to ruin your business.

If your small business is hit with legal action, the first thing to do is to call your business lawyer. Allow them to guide you through the process. Give careful consideration to the advice they provide.

The next call should be to your insurance company. Let your insurer know what happened, and confirm that your insurance policy will help to protect you.

Not all legal disputes are created equal. But it is fairly common for legal disputes to end in a settlement.

If you do have to step into a courtroom, legal fees could start to increase significantly. Even if you’re not at fault for anything, the cost of going to court can put a financial strain on your business.

This story was produced by NEXT and reviewed and distributed by Stacker.