How to Protect Assets From Unexpected Lawsuits
Imagine building a business from the ground up, pouring all your hard work, time, and resources into it. Your business finally takes off and brings in profits, but just when you think you’ve made it, a lawsuit strikes. Unexpected lawsuits can be devastating for any business owner, threatening your assets and potentially putting you out of business. In today’s world, lawsuits are, unfortunately, a common occurrence and can happen to anyone. Therefore, it’s crucial to know how to protect your assets from unexpected lawsuits. In this article, we’ll discuss the different steps you can take to safeguard your assets and ensure your business’s long-term survival.
Understanding the Risk of Lawsuits
Before we dive into the steps on how to protect your assets, it’s essential to understand why lawsuits can occur and their potential impact. Lawsuits typically arise when a person or entity feels wronged by another party and seeks monetary compensation for damages. In a business context, lawsuits can come from employees, customers, suppliers, or competitors, among others.
In the United States, lawsuits are, unfortunately, a multi-billion dollar industry. According to the American Bar Association, over 100 million lawsuits are filed annually, with an estimated cost of $300 billion to the US economy. The consequences of a lawsuit can range from hefty legal fees, settlements, and judgments to damage to your business’s reputation and potential bankruptcy.
1. Choose the Right Business Structure
The first step to protect your assets from unexpected lawsuits is to choose the appropriate business structure. For most small businesses, a limited liability company (LLC) or a corporation is the best choice. These structures provide a level of separation between the business and personal assets, shielding your personal assets from any business liabilities or lawsuits.
Under an LLC, the business’s profits and losses pass through to the owner’s personal tax returns, limiting the company’s liability to the amount invested. A corporation, on the other hand, offers shareholders limited liability, meaning their personal assets are protected in case of a lawsuit against the business.
2. Get Adequate Insurance Coverage
No matter how careful you are, lawsuits can still happen. In such cases, having adequate insurance coverage can mitigate the damage. General liability insurance, for instance, can protect against lawsuits arising from third-party bodily injury, property damage, and advertising injury. Similarly, professional liability insurance covers legal defense costs and potential damages in case of a malpractice suit.
Depending on your business’s operations, you may need to consider specific types of insurance coverage, such as product liability insurance if you manufacture products. It’s crucial to regularly review your insurance policies to ensure you have the appropriate coverage and that they are up-to-date.
3. Separate Personal and Business Finances
One common mistake made by small business owners is mixing personal and business finances. This makes it difficult to differentiate between business and personal assets, leaving both vulnerable to lawsuits. Maintaining separate bank accounts and credit cards for personal and business use can simplify accounting and protect your personal assets from business liabilities.
Additionally, be cautious of personal guarantees, where personal assets serve as collateral for business loans or credit. In case of a lawsuit, your personal assets could be at risk if your business’s assets are not enough to cover the liability.
4. Consult with an Attorney
Seeking the advice of a business attorney can help you assess your company’s legal risks and potential vulnerabilities. An attorney can help you determine the appropriate legal structure for your business, review contracts and leases, and suggest measures to safeguard against potential lawsuits based on the nature of your business.
In case of a lawsuit, an attorney can also provide representation and guide you through the legal process, potentially reducing any monetary damage and protecting your assets.
5. Establish Clear Policies and Procedures
Having clear policies and procedures in place can help prevent potential lawsuits. For instance, employee handbooks that outline company policies and procedures can help avoid discrimination lawsuits, while clear return and refund policies can reduce the risk of consumer lawsuits.
Additionally, regularly training employees on workplace policies and procedures can help minimize risks and ensure compliance, ultimately protecting your assets from potential legal claims.
Conclusion
In conclusion, lawsuits are an unfortunate reality of doing business. However, by following these steps and seeking the guidance of an attorney, you can significantly reduce the risk of unexpected lawsuits and protect your assets. Remember to regularly review and update your strategies as your business evolves to ensure continued protection.
