How To Protect Your Business From Lawsuits


If you’re in a car accident and you’re at fault, you probably won’t end up paying anything out of pocket. Your insurance company will cover the damages incurred by the other driver in an at-fault accident, and while your insurance premiums might go up, overall it’s not a huge financial issue for most people. 

However, if you have a business and you’re sued, you might not enjoy the same peace of mind. 

For entrepreneurs, one of the most important things you can do is make sure you’re legally protected, and you have things in place so that if you are sued, you can weather it. Keep the following in mind to protect your business from lawsuits. 

Separate Your Business and Personal Finances

As an entrepreneur, one of the first things you need to do is separate your business and personal finances. 

A lot of times, entrepreneurs will make the mistake of thinking their business isn’t big enough for that to matter, but that’s never the case. Even if you do face a business lawsuit, if you have your finances separate,it’ll give you some level of protection. 

To separate business and personal finances, do the following:

  • Establish a separate legal entity for your business. 
  • Open a small business bank account. Don’t use your personal checking account for business expenses and vice versa. 
  • You might apply for a DUNS number. This is a U.S. business identification number that will allow you to build a separate credit identity that’s distinct from your personal credit. 
  • Your utility accounts should be established in your business name. 
  • Start applying for credit in the name of your business. This is not just good to protect you, but it can also help you when you need to grow your business using credit. 
  • Get a business credit card. 

Along with the legal protections of doing the things listed above, it’ll also make accounting easier for your business. 

Incorporate Your Business

So this was briefly touched on above, but one of the ways that you’re going to protect yourself as a business owner, including if you do end up facing a lawsuit, is by incorporating your business

When your business is incorporated, if someone does sue your business and wins, this prevents a financial settlement from being collected against your personal assets like your home and bank accounts. 

Incorporating your business and separating it from your personal finances isn’t going to necessarily keep you from getting sued, but it is going to help if you are. 

Have the Right Insurance

If you’re an entrepreneur, you need to talk to an insurance professional who can help you understand what coverage you truly need.

For example, you’ll need general liability insurance at a minimum. This will protect you if you have an employee who files a lawsuit after getting hurt at work,just to highlight one possible scenario. 

A lot of businesses will also get errors and omissions insurance, which is protection against lawsuits filed by clients if you make a mistake during a project. 

This is just the tip of the iceberg and your business insurance needs are likely to depend a fair amount on your industry, so again, an insurance professional is someone you should absolutely consult with. 

Put Everything In Writing and Keep Detailed Records

No matter what you’re doing, put it in writing. For example, if you think you’re just doing some casual work for a client, you should still have a formal contract that outlines the scope of work and expectations on both ends. 

You need to clarify the rights and duties of all involved parties in everything you do. 

You also need to have detailed records and keep digital backups of everything too. 

If you aren’t sure where to start as far as formalizing contracts, talk to an attorney. 

You want employer contracts, client contracts, and vendor and supplier contracts. If you have good templates that are quickly accessible, you can customize them as needed and it shouldn’t be too time-consuming. 

Be Careful and Cautious

It sounds intuitive, but many business owners aren’t careful and cautious with what they say and do. You want to protect the reputation and public image of your business. 

You don’t want to get angry and start talking about a former employee in a way that could be considered slanderous, for example. Be careful about your social media activity too, even if you’re not acting in an official capacity as a representative of your business. 

Have Company Procedures and Policies

As an entrepreneur, you want to structure a scalable business, and you can do that by having carefully detailed procedures and policies in place for how you do business and how your employees are expected to behave. 

Having these written procedures and policies will help your business run more effectively and can also protect you from potential lawsuits. 

Make sure you have an employee handbook at a minimum, but as your business grows, your handbook and other relevant policies will probably need to grow as well. 

Provide Great Customer Service

When you prioritize customer service, you’re reducing the risk that you’re sued by someone who’s unhappy. You and your employees should make customer service one of the things you focus on most heavily every single day. 

Train your staff accordingly to ensure they’re meeting the customer service standards you set out. 

Finally, you should always work to behave honestly and ethically. 

Even if you think there’s a shortcut you could take in your business that might not be fully ethical but would help you make money, you should avoid it.

Those things that seem too easy or too good to be true often are, and they can end up costing you a lot more. It’s sometimes impossible to entirely avoid lawsuits when you own a business but there are a lot of things you can do to, first of all, mitigate the fallout if you are sued, and also to create a business with a lower likelihood of being sued.

About Carson Derrow

My name is Carson Derrow I'm an entrepreneur, professional blogger, and marketer from Arkansas. I've been writing for startups and small businesses since 2012. I share the latest business news, tools, resources, and marketing tips to help startups and small businesses to grow their business.