First, the title of this article is a misnomer. Everyone can get sued. Anyone can sue you. The issue is not whether someone can sue you, it’s whether you will prevail because of the procedures you have put into place to protect you. Common sense is your best guide to not getting sued. This article will focus on FIVE tips to protect yourself against the most problematic areas business owners face.
Tip #1: If it’s a business and not a hobby, treat it like one.
Stay away from being a sole proprietorship if you are thinking about creating a business. A sole proprietorship is fine if you have a hobby. A business structure like a limited liability company or a corporation is relatively easy to create and, once in place, that structure will protect your personal assets from a business lawsuit. What does that mean? If someone wants to sue your business, that person can only reach the assets of the business, not your personal assets. To protect yourself and your family, make sure you have correctly created the business structure. This requires, by the way, that you use a professional to help you set up your business.
Business structures are not one size fits all. If you have a spouse or a partner you want to work with as a business owner, your basic corporate documents must address what happens if one of you dies or is disabled. The basic corporate LegalZoom documents will not help you. Go to a professional for the creation of the business and get it done the right way.
Does just creating the correct business structure protect you from suit? No. Especially not if you have not followed customary business procedures. The way for an adversary to get to your personal assets is to prove that you have not run the business like a business. This is called “piercing the corporate veil”. Basically, if you have all your business financial statements on the backs of envelopes, your contracts are oral, your “business” bank account is actually your personal bank account, and you do not refer to your formal business name when conducting business, there is a good chance in a lawsuit you would not be able to protect yourself against piercing.
Tip #2: Don’t Even Think About Using Oral Contracts
Contracts, agreements, financial transactions must all be written and made easy to understand. The major problem all small service businesses face is not using a written contract with standard terms and conditions that relate to your business. It takes a professional to help you figure out what your standard contract should address. For example, if you are a wedding planner and your customer cancels the wedding, who pays you if your services have already been rendered. Unless you have a contract that is very specific about what happens if the wedding is cancelled, you are likely to be on your way to litigation. How easy it is to protect yourself with a visit to an attorney to create a contract for your business. The basic saying is don’t be “penny wise and pound foolish.” Pay money up front to get your business and contracts organized.
Tip #3: If You Can’t Understand It, Your Customer Can’t Either
This relates to the prior point about written contracts. Once you do obtain a standard contract, make sure it is written in standard language. If you cannot understand the language, neither can your customer and misunderstanding the terms of your service is a clear path to litigation. This is true about more than just contracts. Be very clear with your customers about expectations. What are you saying you will do in terms of tasks? To what extent will your performance of your services depend on what the client does? What if the client doesn’t do what they say they will? You can and should address these issues in your written contracts, but just in oral conversation, you need to make clear what you expect out of the relationship and the customer needs to know the ground rules of the engagement.
By the way, do not vary from your standard terms unless you specifically put that in writing. If your standard contract calls for a payment of a certain percentage of the bill upon certain events and you want to do something different with a customer, make sure you write it down and both of you sign it.
Tip #4: Employees Or Independent Contractors?
One of the major issues to be determined by the new business owner is whether your employees are full-time employees who work only for you or whether they are independent contractors who also work for others. The Internal Revenue Service is focused on this issue because so many business owners have mistakenly classified their employees as independent contractors that catching and punishing employers for this is easy. This subject, alone, deserves an article. However, to summarize, if someone works for you full-time at your direction, they are employees and you must withhold taxes from their paychecks and pay over the taxes to the government. If they do not work for you full-time and collect salaries from other employers and meet other criteria, they can be classified as independent contractors. In that case, when you pay them, you do not withhold taxes. They are responsible for paying their own taxes. The IRS loves to challenge the classification of employees as independent contractors since most business owners do not back up their classifications with evidence and the IRS can easily re-classify employees, requiring the employer to pay back taxes on amounts not withheld that should have been, along with penalties and interest.
To protect yourself and your business, any employer who deals with independent contractors must have an independent contractor agreement signed by the contractor and employer that recites all the IRS guidelines and represents that the contractor and employer are following such guidelines.
Tip #5: Payment For Services
You are in business to make money. Not focusing on your form of invoices or requests for payment almost invites disputes with customers. How will you be paid for your services? What if the customer is not satisfied with your services and refuses to pay you. What will you do? You need to focus on a policy to use under all circumstances. Imagine all of the “horribles” that could occur with your customers and address how you will handle those up front directly to the customer. The rule to follow is no surprises for your customers or for you.
FREE CLASSES AT OUR NEW LARGER OFFICE IN NORTH BEACH. To learn more about estate and business planning, we are pleased to offer free classes open to everyone on the 2ndWednesday of each month beginning Jan. 11, 2018 at 11am. Classes will be held at our new larger office at 8906 Bay Avenue in North Beach (Bay Avenue facing the Boardwalk between 2nd and 3rd. Free parking out front). Give us a call at 301-855-2246 to reserve your space or just drop by.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over 30 years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.