Learning Objectives
- How to minimize potential exposure to your business in advance.
- How to address claims, efficiently and expeditiously, if they come to light.
Where We Are As Small Businesses
It’s not an exaggeration to say that small businesses are the lifeblood of the US economy. They create jobs in low-income communities, contribute significantly to the private economy – 43.5% of the national GDP! – and they’re often headed by vocal community leaders. Despite this, small businesses are not safe from a society that’s overeager to bring lawsuits. Consequently, these businesses must take proper steps to protect themselves from expensive and time-consuming legal challenges. This includes purchasing liability insurance, taking care in how you conduct business by being mindful around customers and employees, dealing fairly with suppliers, etc., and having competent legal assistance on standby.
What’s a Small Business?
About 99.1% of businesses in the US are considered “small businesses” or “Main Street businesses,” which, according to the federal government, are businesses that (a) employ less than 500 people or (b) make less than $10 million in annual revenue. In terms of employment, small businesses have generated 17.3 million new jobs between 1995-2021 and employ 61.7 million Americans as of 2023. They also provide opportunities across all groups of people, with 12.07 million small business firms being women-owned, 9.75 million being minority-owned, and 1.74 million being veteran-owned.
Moreover, small business owners are trusted leaders with large voices in their communities. This isn’t just because these people are successful business owners; it’s because these business owners are a major part of the local community. They’re our parents, our neighbors, our cousins, our old friends, our new friends, and the list goes on. These business owners can build close relationships with their customers and clients and put the money they make back into the community. On the flip side, customers who shop at local businesses rather than the nearby Walmart or Target, can help these businesses grow and expand. Thus, the business owner-customer relationship can be mutually beneficial in a smaller community.
Unfortunately, small businesses also face a society that feels comfortable suing them without regard to the financial and reputational harm that comes with a lawsuit. In fact, almost half of civil lawsuits target small businesses. Small businesses can be sued for several reasons, including:
- Failure to provide a promised product or service
- Breach of contract
- Unlawful termination
- Discrimination, harassment, or retaliation
Most small business owners choose to settle claims against them rather than go through the expensive and time-consuming process of litigation. Unfortunately, there are liability costs outside of litigation that can cost small businesses a lot of money.
How much can litigation cost my small business?
The answer: a lot. A 2013 report by the United States Chamber of Commerce Institute for Legal Reform found that the liability costs in the United States are twice as high than average costs in other countries. Additionally, commercial liability insurance is expensive, doesn’t cover all kinds of claims, and burdened small businesses with a cost of about $160 billion in 2021.
Despite bearing a larger commercial liability insurance cost at $187 billion, larger (mega) companies have the available resources and money to litigate without threatening their financial stability. These companies might even have in-house counsel and a budget set aside for potential litigation. Thus, the cost to litigate is downgraded to nothing more than a “rounding error” on the corporate spreadsheet, and these businesses can carry on as usual.
However, small businesses do not have this luxury. Small business owners are involved in litigation from start to finish and typically spend a great deal of time away from their businesses to meet with lawyers, attend hearings, sit for depositions, etc. As a result, some end up going out of business because of the heavy costs associated with litigation. Furthermore, small businesses, if they survive litigation, may have to restructure or liquidate their assets to recover from any financial losses (e.g., laying off employees).
The financial costs are not the only harm faced by small businesses in a lawsuit. The reputation of a small business can also be significantly damaged because of a pending lawsuit. Many customers or partners will not want their names associated with a small business that’s being sued due to the social stigma around lawsuits and legal troubles. This is especially harmful considering the importance of having a strong bond between small business owners and the rest of the community.
Ultimately, it’s extremely difficult for small businesses to bounce back from litigation. That’s why it’s important to prepare in advance for any potential lawsuits or issues you might face.
So how do I protect my small business from a lawsuit?
There are several ways that a small business can protect itself from expensive litigation.
1. Think about how best to structure your business.
Structuring your business as a limited liability company (LLC) in New York is one way to shield your personal assets in certain circumstances. The LLC structure is not reserved solely for major businesses or businesses with more than one owner. In fact, one of the most common capital structures for small businesses is the single-member LLC, which holds all the same advantages as an LLC with multiple members.
Many potential entrepreneurs choose to structure their business as an LLC because liability for contract obligations, the business’ debts, and other liabilities associated with the business will not affect their personal assets (e.g., your car, your house, etc.). Of course, that doesn’t mean you can treat your employees unfairly and not be held liable. However, you can sleep easier knowing that the debts of the business are less likely to affect your personal assets and finances.
LLCs also are highly flexible in structure, meaning that the terms of the operating agreement set out how business will be conducted and what powers can be held by partners in the business. This flexibility also allows the owner to easily change their structure if they find that the LLC structure is no longer appropriate. LLCs also can feature pass-through taxation, meaning that the company’s net income – and any tax liability – is passed through to the owner. That way, the business owner avoids double taxation (once on the corporate tax return and a second time on their personal tax return) and generally can claim business income deductions.
LLCs are not the only structure available for your business – indeed, another form is the corporation. That’s why it’s a good idea to sit down with an attorney to discuss the different structures available to you and which one will best suit your business.
2. Purchase liability insurance.
Owners can decrease the risk of financial harm to their small businesses by purchasing liability insurance in advance of any potential litigation. This is important for businesses without limited liability as the litigation costs can extend to an owner’s personal assets. On average, around 75% of small businesses are underinsured and many fail to update their insurance after ten years.
There are multiple types of liability insurance available to business owners: general liability insurance, workers’ compensation insurance, employment practices liability insurance, product liability insurance, cyber insurance, professional liability insurance, and so on. There’s also what’s called the “business owner’s policy,” which can combine all typical coverage options into one package for small business owners. At the very least, small business owners should look into commercial general liability insurance, which is meant to cover financial losses resulting from accidents. Accidents can even happen when a customer trips and falls at your office or shop.
Small business owners should reach out to a variety of different insurance agents after assessing their liability risks to see which policies are best for their business. After finding a good policy, these owners should re-assess their liability risks every year and upgrade their policies as needed.
3. Complete HR audits annually.
While your team members are your biggest asset, they also can create liability. That’s why it’s important to regularly check and then ensure your human resources practices comply with the law. One of the complexities of HR is that it’s governed by both New York as well as federal law, so you need to be aware. Simply stated, an HR audit is a regular review of your HR practices to see what you’re doing well and what areas might need improvement. They’re usually done annually and involve different types of reviews:
- Documents audit: meant to ensure that records are stored safely and securely, that records are not accessed without permission, and that electronic files are properly encrypted;
- HR functions audit: analyzes your recruiting and hiring practices, onboarding, employee training practices, and employee salary and compensation rubrics;
- Legal compliance audit: makes sure your company complies with legal standards (g., ADA, EEOC, FLSA, healthcare benefits, etc.)
- Policy audit: analyzes policy aspects such as your disciplinary process, termination policy, and PTO or paid medical leave policies; and
- Safety audit: ensures that your company is OSHA compliant, is aware of any New York safety rules, has compliant safety data sheets if relevant in your industry, and has necessary PPE on hand.
HR audits not only help protect you from litigation but can help ensure corporate compliance, prevent non-compliant hiring and employment practices, and identify necessary additions or improvements. To begin an HR audit, you should decide if you have the capacity to conduct the audit in-house or if you should engage a consultant.. Then, after gathering the data collected, review your findings and implement any necessary improvements to help make your business litigation-proof.
4. Take care in how you interact with customers and employees.
We know how integral small business owners are in the community and how close we can be to our neighbors, friends, and colleagues. Treating customers and employees with the respect and generosity they deserve is fundamental to keeping your business free from litigation. This includes not engaging in any inappropriate behaviors or conversations, consistently listening to employee feedback, and having clearly stated policies concerning the work environment.
5. Have competent legal help on standby.
It’s important to not only have competent legal help, but to have a lawyer who can be a true partner to you when navigating the world of commercial litigation – and trying to avoid it as well. You want an attorney whom you can trust and who knows the ins-and-outs of the issues facing small businesses. In fact, lawyers can help small business owners with a variety of other issues besides litigation, such as drafting and reviewing contracts with potential suppliers. When vetting a lawyer, make sure to check how much experience they have with commercial litigation and with business law in general.
What if someone sues my business?
First things first: stay calm. That’s much easier said than done, yet it’s important to keep operating your business as efficiently as possible so you can minimize the financial costs of the lawsuit.
Next, call your attorney or seek the advice of an attorney who has experience with small business litigation. After that, make sure to work closely with your attorney so you can get the best possible result.
Finally, it’s important to begin recovery right away by looking at how much the lawsuit has cost your business. It takes time for a small business to recover from litigation. Thus, a small business owner will want to think about lessons learned from the experience and modify her practices in order to reduce or eliminate future liability.
Lawsuits can be a terrifying prospect. No one wants to be hauled into court, spend time on the discovery process, get distracted from the focus of their business or profession, and face the expense of litigation. Fortunately, there are ways to avoid the cost of some lawsuits altogether, such as certain types of liability insurance and conducting regular HR audits to nip potential risk in the bud.
Still, things happen in life and business. That’s why it’s important to build a relationship with an attorney who will help you navigate the complex, and often confusing, world of business risk, claims, and litigation.
If you have questions about your company’s exposure to internal or external claims, we can help. Don’t hesitate to contact The Coppola Firm at info@coppolalegal.com or 716.839.9700.
