The Small Business Administration recently reported that most small businesses will be involved in litigation in one form or another during their lifetime. The impact of litigation on small business goes beyond any payment of legal fees. As owners of small businesses are completely vested in their operations, litigation can cause not just financial disorder, but also emotional hardship and an attendant, unplanned change in business strategy as a means of managing a legal dispute. Most small business owners would rather settle a dispute than litigate one. They fully understand that the costs of going through litigation and trial are too steep, particularly if they lose and then have to pay damages. When the costs of litigation are fully realized small business owners, in most cases, attempt to recoup their losses by cutting operating expenses, expanding services to existing customers and, in some cases, raise prices in order to pay for damages and attorney's fees accumulated as a result of the litigation. In order to best manage any future litigation, here are the things your small business needs to know.
A. The most common litigation area for small businesses remains contract disputes. Whether the dispute arises from an employment contract, contract for goods and services or even a failed loan agreement there are innumerable contract problems that can arise in the normal course of operating a small business. As a small and/or new business owner, it is imperative that you stay away from signing any personal guarantees relating to any corporate-contractual obligations. Having properly prepared and drafted contracts is an absolute must for any small business owner.
B. Intellectual property rights. Many businesses use other businesses' intellectual property, for example, trademark or service mark, either because they liked the mark and thought they could use it without any repercussion. Such is not the case. In order to avoid litigation in this area, it is imperative that your new business understands, even on a basic level, intellectual property law in order to later avoid costly litigation by a third party. More importantly, your business needs to understand how to protect its own intellectual property from being stolen by third parties.
C. Employment disputes. The potential for a lawsuit with an employee begins at the point when the potential employee completes his employment application all the way up through and including when that employee leaves to work for a competitor. By ensuring that your business has the right tools to combat employee fraud, theft, competition, harassment and/or matters involving discrimination, your business needs to have an arsenal of documents to protect itself from one of the most fertile areas of litigation in the United States. Compliance with all internal federal rules and regulations, such as posting of EEOC required posters, is mandatory.
D. Personal injury litigation. When you think of quicksand think of personal injury litigation. Like employment litigation, personal injury litigation can take place within or without the corporate environment. Injuries such as slip and falls that occur at your company's place of business to third-party actions involving drivers carrying out business duties need to be taken very seriously. In order to mitigate the risks associated with all personal injury litigation, your company must obtain the appropriate amount of worker's compensation, general liability and/or automobile insurance.
It is imperative that the limits of each policy are set according to your specific business needs and that you obtain the appropriate coverage for each area only after you discuss your company's specific needs with your insurance agent. Never assume that by having just general liability insurance that this will cover all of your insurance needs. Quite often, general liability policies are written to cover premises liability cases, for example. In some cases, and depending on the line of work involved, breach of contract or errors made by a contractor, accountant and/or architect will require more specialized lines of insurance coverage such as separate errors and ommissions policy or product liability policy. Whether your employees should be bonded is another question for your insurance agent.
E. Corporate entities and personal protection. If you are running your small business as a sole proprietorship you may be making a big mistake particularly if you are engaged in a high-risk business. On the other hand, if your company is organized as a corporation but practically functions more like a sole proprietorship then a potential plaintiff may be able to "pierce the corporate veil." In such situations, an aggrieved party is able to go around the wall of the corporation to bring suit against an individual business owner. This situation can be avoided by having both proper insurance coverage and operating your corporation( whether as a PC, Inc. or LLP) properly and consistent with the requirements of state law. In Massachusetts, the easiest way to pierce the corporate veil is to demonstrate that the business funds are commingled with personal funds and are being used for individual and not corporate purposes.
As a small business owner, you should never disregard any legal complaint or claim. Every complaint or claim should be treated seriously and all applicable deadlines must be met. At the Katz Law Group, our extensive combination of both business and litigation experience gives our clients an edge in avoiding many difficult legal situations. Please call us at 508-480-8202 for further information and guidance.