Lawsuits are often considered inevitable for any successful company, therefore it is critical that entrepreneurs take steps to mitigate their companies’ risk and exposure to liability.
The first and easiest way to limit liability is to form the business under a limited liability formation, such as a corporation, limited liability company, or limited liability partnership.
Secondly, business owners will want to ensure that they are in proper compliance with all government regulations. This includes not only undertaking all required actions and refraining from prohibited activities, but also ensuring that the business has submitted required paperwork in the proper form and by the required time before undertaking any particular action. This may be particularly important, even for businesses that are organized under a limited liability form, as some administrative laws have penalties for the individual owners or managers of a business in addition to or as opposed to the business itself; furthermore, some laws, in particular securities laws, are both civil and criminal in nature — failure to abide by them could theoretically result in incarceration (although in practice for small businesses this is a highly unlike proposition).
It goes without saying, but another ideal way to avoid liability for your business is to get everything in writing. This is particularly important when it comes to employees; having offer letters and employee handbooks with clearly defined roles, rules, and expectations for all employees increases the likelihood that employees will be productive, and sets out procedures for disciplining, retraining, or terminating problem employees.
Another area where it is important to have written policies is when it comes to customer relations — warranties, service agreements, and return policies. Many lawsuits against businesses arise from disgruntled customers — having clearly defined policies, and being proactive in following up and attempting to resolve every situation with an unhappy customer can avoid many lawsuits for a company.
Finally, when all else fails, having a good insurance policy for your business can mitigate its exposure in the event of a lawsuit against the company. Not only will the insurance company defend you against a covered legal claim, but will pay part or all of a judgment, minimizing the financial loss from any suit.