by Gahram Kang, Esq.
Was that a typo? Actually, the title of this article was to grab your attention and help you to realize that you may be operating your business in such a way that is leaving you vulnerable. What I’ve learned during my 12 years of serving business owners is that anyone can (and will) sue for anything, even frivolous and ridiculous claims, if they think they can get even a small settlement, and sadly, as I am discovering more often than not, there are lawyers out there who will take those cases and pursue those ridiculous claims against you.
The best thing that you can do as a business owner is to strengthen your defenses in advance and not fall into the traps that can increase your risk of LOSING those types of lawsuits because of basic yet impactful decisions you made over the years. Here is a list of 5 ways to not only encourage people to sue you, but also ensure that you will come out as the loser:
1. Do Business with Untrustworthy Characters – Normally, we do business with people we like and people we trust. But sometimes, out of the goodness of our hearts, even though there are alarms going off in our heads, and red flags waving everywhere, we decide out of the kindness of our hearts to give someone a chance to prove us wrong, because we felt sorry for them. Those inevitably end up costing us the most – it could be a customer, an employee, or even a vendor, but whatever role they play, they end up betraying your trust, demanding something they feel entitled to, and ultimately becoming an expensive lesson that you wished you had learned before you met them. The longer you’ve been in business, the more likely you have had experiences like these at least once or twice. TIP: Let’s learn our lesson and listen to your gut telling you to turn away from this “business opportunity” and do business with people that we can trust.
2. Operate Your Business as a Sole Proprietorship – I know we’ve been over this before, but if you are Jane Smith operating your interior design business as “Jane’s Designs” which means you have a Fictitious Business Name (DBA) to “do business as” Jane’s Designs, then there is no real business entity to protect you. Your business is just an “alter ego” of yourself as an individual, and anything that happens at your business can and will impact your personal assets. If you fail to pay a debt and you get sued, they can and will pursue the judgment against your personal bank accounts, your home and anything else you own in your name. Strangely enough, some businesses are actually incorporated but still run their businesses as an alter ego of themselves, never complying with corporate formalities (like issuing stock, signing bylaws, holding annual meetings), which exposes their personal assets to liability as if they were never incorporated.
TIP: Consider forming a protective structure like a corporation or a limited liability company to separate your business matters from your personal assets, but comply with the corporate formalities. At the end of the day, the tax advantages and risk mitigating factors make the additional fees worth it, so long as you train yourself to run your business like a separate protected entity.
3. Don’t Read the Contract Before You Sign It – I’m sure that none of you have ever knowingly signed a contract that you didn’t read thoroughly in advance, but then again, does anyone ever really read all of the fine print, especially in your commercial leases (see article below)? Or sometimes you get so focused on the major terms of a business deal that you are excited about that you gloss over the other minutia, never dreaming that there could be critical provisions in there that will come back to bite you later. Unfortunately, after the worst case scenario occurs, “I didn’t know it said that” is not a valid excuse when you’re being held accountable for a specific contract provision.
TIP: The good news is that even if you have signed business contracts that you haven’t read, it’s not too late to review them NOW, before something terrible happens that makes those minor provisions significant. If you at least read the contract now, you can determine what your rights and obligations are, and before certain situations arise, you can plan ahead and protect yourself knowing what you need to brace yourself for.
4. Run Your Business Without Insurance – If you are a classic entrepreneur personality type, then more likely than not, you love taking risks! That sometimes means that you will take both calculated risks and unnecessary risks, such as operating your business without any insurance. California law requires that you obtain workers’ compensation insurance if you have even one part-time employee, but what about the other kinds of insurance that are optional? If you made Mistake #2 above and didn’t have a commercial general liability insurance policy with reasonable limits in place, you missed the opportunity to establish a first line of defense for your sole proprietor business in a lawsuit. If you own a building and have tenants renting either commercial office space or residential units, sometimes their visitors (people you don’t even know) could end up suing you (as the building owner) for something that wasn’t properly maintained inside the building (!)
TIP: Meet with a business insurance broker at least once a year, and familiarize yourself with the various types of insurance that are available to cover the risks that you are most vulnerable to, customized for your industry – whether it’s Employment Practices Liability Insurance (EPLI) (usually covers wrongful termination claims), Completed Operations/ Products (covering products that you sell in a situation where a 3rd party gets injured after the product leaves your business) or Errors & Omissions (E&O) Insurance (if your clients sue you for inadequate work or negligent actions by you or your employees), there are many different types of insurance to address the risks for your particular business, and you’d be surprised at how nominal are the premium costs.
5. Don’t Protect Your Brand (IP) – again, it sounds crazy to think that anyone would knowingly do business while exposing their most precious possession (their company’s IP) without protecting it, but we do it all the time! We come up with a brilliant company name or creative product name, and we start selling goods or services using the name, and then a couple of years later (or months now that the Internet exposes our mistakes faster), your competitor will sue you for trademark infringement or send you a cease and desist letter, and you have to prove that YOU came up with the idea or name, and you were actually using it FIRST. (Or the reverse happens and you have to sue them for trademark infringement, which is extremely difficult as well.)
TIP: It costs nothing to utilize the “TM” symbol for trademarked names, and the © symbol for written materials, and you’d be surprised at how little it costs to actually register your trademarks (so that you can earn the ® symbol) or to register your copyright, especially when you consider how valuable your brand name truly is to your business.
As you continue to operate your businesses and do what you do best: provide quality products and services, we wanted give you practical tips to help you protect your biggest asset (your business), so that you can stay in business for years or even decades to come. Please feel free to ask us for elaboration on any of the above tips and issues.
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