Getting sued is every business owner's nightmare. Unlike most nightmares, however, where you're usually being chased by fire breathing dragons or standing naked on the dance floor at your high school class reunion, this one has a high probability of coming true.
The bad news, according to attorney Wyndell Banks, founding partner at The Banks Law Firm in Washington, DC, is that if you're in business long enough, you're bound to get sued by someone for something. The good news is, most start-up entrepreneurs are faced with lawsuits over relatively small claims, and the matters can often be resolved outside of court.
Banks, who once worked for the SBA and now specializes in small-business issues, says the most common types of lawsuits involve contractual issues in which one party doesn't deliver the product or service as promised.
Dennis Jacknewitz, a partner at Jennings, Jacknewitz, Schrader PC in Belleville, Illinois, recalls a case where a beauty shop owner turned a customer's hair into a Halloween fright wig and the customer sued. In another case, the owner of a carpet-cleaning business used a chemical that changed the color of a client's carpet. Banks often sees cases where start-up entrepreneurs, in an effort to save money, either don't hire an accountant and attorney to correctly set up the business, or simply don't pay their taxes.
"In two or three years, when the taxing authorities notice this, those decisions are going to come back to bite [the business owner]," Banks says. In other cases, entrepreneurs don't bother to get the proper business licenses and wind up paying the price down the road in the form of fines and penalties or even criminal liability.
If you're sued, attorneys advise you first to place a call to your insurance agent. You may have coverage that will help settle any claims. Next, contact your attorney and get him or her involved as soon as possible. If you don't have an attorney, however, don't resort to picking one at random from the telephone book. In the event of a lawsuit, it's important to find an attorney who specializes in small-business issues. The best approach is to get referrals from other business owners; if that doesn't work, contact the local bar association.
When you've selected an attorney, communicate honestly, and bring all relevant files, records, telephone logs and invoices to your meetings. When speaking with your lawyer, tell the whole truth. Attorneys live to save us from our own mistakes, but they need complete and accurate information from the client in order to do their best work.
At the first meeting, ask your lawyer for his or her most realistic estimate of the possible outcomes and the time frames required to achieve them. Agree on who's going to do what and by when. Then, be available and responsive to your attorney. Don't blow off meetings, hide or neglect to return phone calls.
Clearly, the best advice attorneys can offer is to do everything you can to prevent lawsuits from happening in the first place. Set up your business properly, pay your taxes, deliver high-quality products or services in a timely manner, and get all contracts in writing. Keep thorough records of all business activities, and hang on to them for at least 10 years.
"In the long run," Banks says, "it's cheaper to pay an accountant and an attorney upfront to help you set up the business than to pay them to get you out of trouble later."
Pamela Rohland, a freelance writer from Bernville, Pennsylvania, coaches her staff of four cats.