Lawsuits are always a risk when going into business. Fortunately, you have several options to mitigate this risk and prevent your business from taking a devastating financial blow.
Your business assets encompass everything your business owns, from money in your bank account to vital equipment. There is always a risk for lawsuits so it makes sense to take appropriate measures to safeguard what your business has. The following are some of the, perhaps necessary, options to protect your assets from being lost in court.
1. Establish a Proper Business Entity
The first thing you should do is set your business up as a proper entity under the law. There are a handful of business organization structures to choose from, and the right one will depend on your plans for the business. The simplest is a sole proprietorship, which does not legally separate your business assets from your personal assets and offers the least amount of protection. Corporations come with much stronger protections but also more requirements. A limited liability corporation (LLC) is somewhere between the two in that it doesn’t carry many of the requirements of a corporation while offering more protection than a sole proprietorship. Setting up your business as a separate entity allows you to separate your business assets from your personal assets, which prevents your business assets from being taken to pay for personal debts or as a result of personal bankruptcy.
2. Carry Adequate Insurance Coverage
The next thing you must do is carry adequate insurance coverage. Some types are legally mandated for companies to carry, such as commercial vehicle insurance or workers’ compensation insurance. What is legally mandated is largely determined by your state, so be sure to check with the relevant state department if you are unsure. Other forms of insurance may not be legally mandated but are incredibly risky to go without. Liability insurance is the biggest one when it comes to protecting your business assets from lawsuits, as it will pay court costs and settlements if someone sues your business for an injury or some other issue. Other types of insurance that might be wise to carry depending on the type of business you run include errors and omissions insurance, which protects service-based businesses from losses due to innocent mistakes, and product liability insurance.
3. Keep Business Finances Separate
Simply establishing your business as an official entity will not always shield your business from creditors. It is important to keep everything separate, particularly by maintaining a separate business bank account, credit card, and checkbook. Be sure to keep immaculate records and use the business entity name for all functions, among other precautions. This will help prevent creditors from piercing through your corporate veil and getting at your business assets when you personally run into financial trouble or are battling a lawsuit. It is also simply good practice to avoid mixing your business and personal finances for an easier time filing your taxes and a lower chance of being audited afterward.
4. Seek Asset Protection Assistance
Some businesses actually offer asset protection services to help you form an effective asset protection strategy. These professionals will come in, look at how your business is being run and the protections you have already put in place, before suggesting where you could make improvements. You should also retain an attorney for the purposes of asking legal advice when you need it and giving your company its best chance in court. If you wait to get an attorney until you are being sued, it is unfortunately too late. Work with a qualified asset protection attorney in your state towards the goal of minimizing the risk to your assets by taking preventative measures to shield yourself legally.
5. Have Airtight Contracts
Contracts are critical in the business world to establish a relationship with another business, hire an employee, outsource to a contractor, or make any other kind of arrangement. Contracts are legally binding and can lead to costly lawsuits if broken. If they aren’t written well, they won’t actually protect your interests and assets when challenged. Once again, a qualified attorney is going to be invaluable for drafting contracts for your business to use as well as looking over contracts you have been asked to sign. Avoid doing business with someone without some kind of contract in place, because then you will have even less protection if a lawsuit occurs.
Lawsuits are always a risk when going into business. Fortunately, you have several options to mitigate this risk and prevent your business from taking a devastating financial blow. Protect your company in all the ways you are able and you will be prepared in the event someone sues you.