4 Potential Lawsuits to Watch Out for in Small Business Avoiding lawsuits isn't as thrilling as winning litigation but it's far less expensive.

By Larry Alton

Opinions expressed by Entrepreneur contributors are their own.


When you consider business-related lawsuits, your thoughts might turn to major corporations that sue one another or take heat from individuals looking for a piece of their massive capital reserves. But, lawsuits aren't relegated to the realm of big business.

In fact, small businesses have to worry about them too. A firm that makes $1 million in annual revenue will average expenditures of about $20,000 per year in legal fees. If you look beyond that average, some companies will end up paying significantly more… and might even have to close their doors because of that.

Related: The 10 Key Legal Documents for Your Business

A perpetual problem.

The lawsuit threat isn't going away anytime soon; in fact, we're seeing a rising incidence of lawsuits in business. If you want to protect yourself against the possibility of a legal mishap, you'll want to know what you might be up against and try to prepare for the worst-case scenario the same way you would for a natural disaster.

Types of lawsuits to avoid.

Below are four of the most common and high-impact forms of litigation that a small business might encounter:

  1. Employment law action. These are based on some violation in your approach to employment. They can vary greatly, depending on the local laws in your region. Many stages of the hiring and management process may come into play here. For example, harassment suits come under this category, as do wrongful termination suits. These are some of the most common suits that small businesses face, so make yourself aware of the applicable laws and try to follow them as best you can.
  2. Intellectual property rights. If you end up using another firm's or individual's intellectual property for your own business, you could be held legally accountable for any profits, and possibly damages. This covers plagiarism and intellectual property theft, but remember that not all of these actions are necessarily malicious or even deliberate. It's easy to use a logo or an image you found on the web inappropriately, so double-check your processes to ensure you aren't doing anything wrong.
  3. Fraud. One hopes your business won't have to worry about fraud; generally, these suits arise as the result of deliberate, malicious actions, such as misleading your customers or otherwise treating them unfairly. You may wish to hire an attorney in the early stages of your company's development if you want to make sure there are no legal ambiguities here.
  4. Contractual disputes. If you might have violated a legally binding contract with a client or vendor, such as a service agreement or a non-disclosure agreement, you could be held legally accountable. Obviously, your goal should be to hold yourself accountable to the terms of all your contracts, and draft your contracts in a complete and consistent manner.

Related: How to Hire an Attorney

How to prevent legal action.

Fortunately, there are strategies you can follow to prevent these lawsuits from arising, or to mitigate the damage once they've occurred:

  • Watch what you say. A simple misstatement could be taken as a fraudulent claim, and a borderline-inappropriate joke could qualify as harassment in the workplace. Before you release any statement, written or verbal, think carefully about the potential repercussions. A bit of proactive screening here can prevent a disaster.
  • When in doubt, avoid it. There are lots of gray areas when it comes to certain business laws; for example, does a slightly inaccurate execution of duties constitute a breach of contract? Is that image you found safe to use in the body of a blog post? If you want to avoid any potential litigation, your policy and practice need to be very conservative -- if you're in doubt about the legality of an action, don't take that step.
  • Seek insurance. Various types of insurance may protect your business against litigation; for example, personal injury insurance may cover claims that your business caused harm to a patron. You may also seek full-fledged litigation insurance to protect your business against a number of potential forms of legal attack.
  • Hire good legal help. This is one area where frugality doesn't pay off. Whenever you hire an attorney, whether in a proactive planning and consulting phase, or as a response to impending legal trouble, make sure you're hiring someone with knowledge and experience. Otherwise, you could find yourself in even deeper waters down the line.
  • Protect your assets. If your business is a sole proprietorship or partnership, any legal action that surfaces against your business may put your personal assets at stake. So instead, protect your assets by establishing a construct for your business; LLCs and corporations are popular choices to limit an owner's personal liability in such cases.

If you employ these strategies, and are aware of the potential legal actions your company could face, you'll be better prepared for whatever comes your way. Most but not all lawsuits are avoidable, so if you do find yourself facing legal action, remain calm.

Related: 5 Legal Tips for Small Businesses and Startups

Just because lawsuits have the potential to disrupt or compromise your operations doesn't mean any lawsuit will. Hire reputable legal counsel, and handle the situation as professionally as you can.

Larry Alton

Freelance Writer & Former Entrepreneur

Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.

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