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Protecting your business from lawsuits

The current profile of the global business playground is dominated by profitability and sustainable development, where stakeholders and investors seek growing return on investment. To answer this trend, entrepreneurs and corporations alike strive towards cutting costs and maximising revenue, while simultaneously creating new business processes, valuable goods and services.

However, this extremely dynamic market game has led to a state where businessmen tend to neglect certain risks and sometimes make irrational decisions, which can result in very expensive lawsuits with devastating consequences for a company and its owners. For small and even some medium-sized businesses, having to pay indemnification worth a few hundred thousand dollars almost always leads to instant insolvency, followed by bankruptcy and ultimately, termination.

In order to minimise one’s vulnerability to potential lawsuits, the following good practices should be considered and applied wherever possible.

Choose the right legal type of your business entity

It is vitally important to consider all necessary aspects of your company’s structure well before you start doing business. For instance, businesses active as sole proprietorships guarantee for their obligations by using the entire property of the sole proprietor. By losing a larger lawsuit, the proprietor stands to lose everything in his possession. A much better option in this case is to opt for incorporating a limited liability company (LLC), which makes the entity guarantee its obligations with only its own property, thus separating its assets from its owner’s assets.

Staff training, data safety and corporate governance

Having a well-trained staff, as well as employing transparent structures and mechanisms of corporate governance in your company is a very efficient way of mitigating risks related to potential lawsuits. By instructing your staff about communication protocols, data sensitivity and disclosure policies, as well as keeping written records and a clear chain of command and responsibility, the entire organisation is much less likely to commit a human error. Training your employees in work safety protocols and constantly maintaining a safe working environment greatly reduces the likelihood of lawsuits stemming from work-related injuries.

Furthermore, it is very important to manage a highly secure local network and take adequate steps to prevent server security breaches – electronic data often contains sensitive third party information and a company can face heavy legal repercussions in case this information gets stolen or leaked from its storage servers.

Secure a competent lawyer

A good lawyer can help prevent potential lawsuits by constantly providing useful advice and ensuring the company’s owners are familiar with legal restrictions pertaining to their business activities. However, if a lawsuit does happen, it is prudent to hire an attorney with specific knowledge of the given field. The reason for this lies in the fact that the very nature of lawsuits varies in accordance with the respective field in which the lawsuit-triggering incident took place.

Obtain and maintain liability insurance

A good start is to always have at least some basic liability insurance. For most small businesses, this cost isn’t really that burdening – it starts from around $400. The more areas one’s insurance package covers, the greater the chance that company won’t be as harmed by lawsuit expenses, should they originate.

Conversely, some businesses tend to rely too much on insurance and become complacent, minimising their own efforts in preventing potential lawsuits from happening. If a company becomes a regular target of lawsuits, its insurance premium will skyrocket and bring additional expenses to the company.

In the long run, preventing a lawsuit is always safer and more cost-efficient than letting a lawsuit happen. The cost of a lawsuit is not just the amount a company has to pay as indemnification – the losing party needs to cover all legal expenses of the process and sometimes pay additional public fines and penalties, or it might even permanently lose its business license. By investing regularly in these prevention measures, a company can greatly reduce its exposure to potential lawsuits and minimise its costs in the long run, thus allowing it to focus more on its core business and generate profit.


About the Author:

Jelena Djurdjevic is a business woman, mom and wife. She is currently staying at home due to a great reason, her family. In her free time she loves blogging about business management.

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