Business and Law

Is the Threat of a Lawsuit a Real Fear?

As a small business owner, you may be one of the 48% concerned about frivolous or unfair lawsuits. According to the U.S. Chamber Institute for Legal Reform, actual lawsuits and the fear of lawsuits cost U.S. small businesses $98 million in 2005. That figure may seem large because it includes money spent on damage awards, settlements, legal costs, liability insurance premiums, and costs incurred by insurance companies on behalf of policyholders. Is the fear of lawsuits a real fear? Unfortunately, yes. Anybody can sue anybody over anything at any time. In reality, 46% of small business owners have been threatened with a lawsuit, 34% have been sued in the past 10 years, and 62% have made business decisions to avoid lawsuits. Indeed, small businesses bear 69% of the total cost of the tort system to all U.S. businesses.

What is the Best Course of Action?

What’s a small business owner to do? For starters, realize that the best defense is a great offense. While most small business owners fear the law, it is much wiser to use the law as a protective shield. There are many business and legal components that contribute to creating the strongest shield possible – business entities (the type of structure that governs your business), insurance, and intellectual property (copyright, trademark, patent, and trade secrets) to name a few.

As a former full-time practicing attorney and now a small business owner, I have been on both sides of the fence when it comes to the legal issues a business owner may face. It is imperative that entrepreneurs understand the basics of the legal side of running a business, and how to use the law as a shield to protect yourself and your business.

Creating a Shield Through Business Structure

The first item a small business owner should consider is the structure of the business. There are 4 basic types of business entities: sole proprietorship, partnership, corporation, and limited liability company. A common misconception of small business owners is that the business entity itself always creates a legal shield. In some instances (a corporation, or limited liability company, for example), this is generally true. However, if you are a sole proprietor (and, if so, you are not alone, as 78% of all small businesses in the U.S. are sole proprietorships), then you essentially have no shield. As a sole proprietor, you are personally liable for all business debts and other obligations. Fortunately, the law is not the only means to create a shield to protect your business. If the business entity itself does not provide a shield, then you can create one by acquiring appropriate and adequate insurance coverage. Thus, a sole proprietorship that is adequately protected by insurance may have an effective shield.

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