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Hire the Best Employees To Help Your Business Grow

By Michael J. McDermott

You can't help but wonder if the Bard of Avon, William Shakespeare, didn't end up on the wrong end of a lawsuit once too often when you read his oft-quoted line from Henry VI, Part II: "The first thing we do, let's kill all the lawyers."

Truth be told, lawyers make a lot of people nervous, but if you are a small business owner-or in the market to become one-chances are good you'll find the services of a competent attorney to be an invaluable asset at some point in your entrepreneurial career.

A good rule of thumb regarding legal questions related to your business is, "When in doubt, call a lawyer." Legal mistakes are a fairly common occurrence in the world of small business. While some may not result in drastic repercussions, others can, so don't put everything you've worked for at risk by hesitating to contact an attorney when you have legal questions.

That said, there are many things small businesses can do to protect themselves from getting into legal trouble in the first place. Taking a few simple steps now can pay dividends not only in reduced legal bills down the road, but in improved peace of mind all the time.

Here, in no particular order, are suggestions from a variety of experienced legal sources on things you can do to protect your business and your rights as a business owner. Keep in mind that neither these tips nor anything else in this article constitutes specific legal advice pertaining to any individual situation. It is offered as general guidance only.

If your business is a partnership, establish the rights and responsibilities of each partner-and put it in writing.

The graveyard of failed businesses is littered with the carcasses of partnerships brought down by the bogeyman of assumption. When one partner assumes one thing and another partner something else, the results can be disastrous. Avoid that pitfall with a written agreement covering:

Legal mistakes are a fairly common occurrence in the world of small business.

  • The amount of time and effort each partner will put into the business.
  • The amount of money each partner will invest.
  • Division of duties and responsibilities among the partners.
  • Contingency plans addressing some of the common problems a business might face, especially in the early days, such as the need for additional operating capital, the departure or death of one or more of the founding partners, or a radical change in the business's target market that could be material to its prospects for success.

    • The best way to document a partnership agreement is in the form of a legal contract. Oral agreements are difficult and sometimes impossible to enforce, potentially leading to a "he said, she said" situation with little chance of a positive outcome. It's worth the expense involved to do this the right way.

    Take steps to make your business less likely to become the target of a lawsuit and to be better prepared in case one does occur.

    No one can sue you if you haven't done anything wrong, right? If only that were true. Some pundits describe the society we live in today as being "lawsuit happy," one that seems to reward idiotic behavior regardless of the validity of the claim. The truth is, anyone can sue anyone else, and defending yourself against a lawsuit can be expensive, regardless of whether you win or lose.

    The first line of defense against lawsuits-frivolous or otherwise-is insurance. Every business, large or small, should have insurance coverage appropriate to its size, industry and inherent risk.

    That is true even for home-based businesses, and it's something that is often overlooked. If you own your home and run your business from it, you probably have a standard homeowner's insurance policy that offers some protection against personal injury suits. However, it may not cover injuries to customers, employees or suppliers of your home business. Check with your insurance agent about adding a rider to your policy for the extra coverage.

    What do you do if a customer or client refuses to pay you? What do you do if a supplier demands additional payment for products or services beyond that to which you thought you'd agreed? These things happen, sometimes as the result of a simple misunderstanding, other times because of sinister motives.

    The best way to protect your business against this potential problem is by getting everything in writing. As with a partnership, a written contract covering a work or supply agreement has much stronger legal standing than an oral agreement. Putting it down on paper can prevent misunderstandings before they happen and lessen the likelihood of legal action.

    Every business should have insurance appropriate to its size, industry and inherent risk.

    Stipulate a dispute resolution process in all contracts, and give careful consideration to the type of process chosen.

    Arbitration and litigation are the two most common means of settling commercial disputes, and each has its own advantages and disadvantages.

    Arbitration is often favored for disputes involving technical issues or small amounts of money, and in cases where the parties to the dispute want to continue doing business with each other. If there are complex legal issues involved or the relationship has turned hostile, litigation may be the better choice.

    There is a trend toward increased usage of arbitration in commercial contracts of all sorts, and it is particularly noticeable in certain segments, such as franchising. Some see this as a thinly veiled attempt by big businesses to limit their exposure to lawsuits and as a de facto trampling on the legal rights of the little guy.

    Others argue that arbitration saves time and money for both parties to a dispute. In the case of a dispute around technical issues, the arbitrator can apply relevant specialized knowledge in rendering a decision-at least theoretically.

    In practice, things sometimes work out differently. In most cases, there is no guarantee the arbitrator's technical competency will be of the level required to settle a dispute centered on a highly technical issue. Too, arbitrators are human and come with their own sets of beliefs and biases based on past experience.

    Choosing between arbitration and litigation before a dispute arises can be difficult. Each approach has advantages and disadvantages relative to the specific circumstances of the situation involved. For example:

  • Arbitration is generally faster and costs less than litigation, but much of the savings comes from limitations placed on the discovery phase of the proceedings. If a case hinges on documents and testimony that may take some time to gather, litigation is usually more advantageous.

  • Arbitration is less formal, often allowing "hearsay" and other testimony that would not be admitted in a formal court hearing-good if such testimony helps your case, bad if it hurts it.

  • Litigation may encourage the parties to the dispute to settle rather than go to trial. It is usually more expensive than arbitration, with the cost sometimes exceeding the potential award, and that provides strong motivation for the parties to negotiate a settlement.

  • Court rulings become part of the public record and trials are open to the public, whereas arbitration proceedings generally are confidential. The favored approach depends on whether you want the world to know about the issue involved or would prefer to keep it between the two parties to the dispute.

    • If you have to go to court, look first at small claims court, where you can represent yourself.

    Sometimes a small business owner has no other recourse but to take an issue to court. Many cases, such as disputes about payment, can be addressed in small claims court, some version of which exists in every state. Because it is a do-it-yourself solution, this course of action most often makes sense only if the amount involved is less than what you might have to pay an attorney to bring a formal lawsuit on your behalf.

    Many cases, such as disputes about payment, can be addressed in small claims court.

    If you find yourself in a situation where a small claim court action seems like the right way to go, start by contacting the bar association in your state. Most offer some sort of guidebook or pamphlet that lays out the process for pursuing a small claims court action, and they are written in layman's terms.

    In a very high percentage of cases, the target of a small claims court action does not even show up for the hearing, in which case a default judgment is entered in favor of the party bringing the suit.