3 Steps to Protect your Small Business: Incorporation, Contracts and Insurance

By Leigh K. Freeman, Small Business Attorney

“An Ounce of Prevention is Worth a Pound of Cure” – Benjamin Franklin

Small business owners face many of the same legal issues as big corporations, but have a fraction of the resources to devote to them. Many times, a lawsuit could have been avoided, or substantially diminished, had the business employed a sound legal strategy at the outset. There are three main steps that small business owners can employ which provide the most bang for your buck in terms of mitigating risk. They are:

1. Incorporate Your Small Business. Small business owners may think that the costs of setting up an entity outweigh the benefits. As a sole proprietor or general partner, you are personally liable for all business debts. Thus, when considering that not only everything you have worked for in your business, but also every single non-exempt personal asset you own is at risk, in many instances the benefits of forming and maintaining an entity will far outweigh the costs. Small business owners are encouraged to seek legal advice from a competent attorney to determine which entity is best for them.

2. Have Your Contracts Reviewed by an Attorney. Most businesses have a standard contract that they enter into with their customers such as a Services Agreement, Consulting Agreement, Purchase Order or other similar agreement. Important terms to consider in such agreements include: scope of work, payment terms, term and termination, warranties (or disclaimers of same), indemnification, integration, choice of law, forum selection, and attorney fees. Again, there is no one size fits all, and the small business owner who invests in a carefully drafted contract specific to their business may save ten-times that amount in attorney fees if an unhappy customer sues them.

3. Maintain Adequate Insurance. There are many different types and amounts of insurance coverage available to small business owners. Small business owners are encouraged to reach out to a licensed insurance agent to discuss the risks faced by their business and discuss appropriate policies to provide coverage in the event of a claim. Many policies include coverage for defense costs, which means that if a small business is sued for a covered claim, the insurance company will cover the costs of defending the case. This coverage can be invaluable to a small business, where the costs of litigation can quickly exceed the amount claimed.