What to Do When Your Business is Sued

You have just received the news: your business is being sued. While you thought this would never happen, actually it can and, more often than not, does; according to Forbes, 36%-53% of small businesses are involved in (at least) one suit in any year, not to mention 90% of businesses in general are active in litigation at any given moment. Flip these figures and we see how litigious the US is: 47%-64% of small businesses are not engaged in litigation, and only 10% of businesses—small and large—are not reviewing a lawsuit with their attorney. So, you got sued; now what?

What You Need to Do

Read on to learn what to do if a client, (former or current) employee, or vendor has sued your business, as well as how you can prevent this situation from happening in the first place. (Plus, ask yourself “is my business name available” and why knowing that information can reduce cease and desist letters.)

1. Do Not Panic

As the figures above indicate, getting sued is not uncommon. As mentioned by Business News Daily, what you do not want to do is immediately contact the plaintiff—especially without your attorney present. The reason being is that you may accidently give him or her more information that will strengthen the suit. Also, do not immediately go public with this information until speaking with your attorney. Depending on the suit, your business reputation most likely is on the line. Making any reckless moves will only risk this more.

2. Contact Your Lawyer—Immediately

What you do want to do is get on the phone with your lawyer as soon as possible. Before going to Z and preparing to go to court, you need to see if the suit was properly filed, if the contract(s) between your business and the plaintiff have been followed, and what course of action is in your best interest—private settlement or go to court.

3. Suit or No Suit, Focus on Your Business

As Business News Daily states, whether you are engaged in a suit or not, you need to focus your energy on your business. Especially during this time, you have customers on the fence debating whether you are trustworthy. Your sales could be dropping. And it is easy to spend time focused on the suit than getting in the trenches. Instead of sitting in despair, perhaps use this time as an opportunity to re-brand your business. (Make sure that if you do go forward with this plan that, while the face of your business may change, the mission statement and message should be consistent.)

Prepare for Lawsuits: How to Be Ready and Stay Proactive

Here are four ways to make sure that you are prepared should someone (or an entity) sue your business.

1. Have Everything in Writing

When you pick up a new client, partner with a vendor…do anything business-related, have a written contract. While verbal contracts can be effective (and legal), because they are not tangible, they are harder to prove than written contracts. And, in some situations (i.e. real estate, land, etc.) written contracts do trump verbal contracts. To play it safe, have everything in writing: the date the contract was formed, what goods or services are being exchanged, the parties involved, what happens if the contract is not followed, etc. (Make sure you and/or your lawyer goes over the boilerplate to ensure the contract is fair.)

2. Limited Liability May Not Be Enough

In general, sole proprietorships and partnerships do not offer limited liability benefits, which means that if your business is sued, your personal assets are on the line as well. To prevent this from happening, you may want to transition to a limited liability company, or C or S corporation. Still, even with limited liability coverage, this may not be enough, and here’s why. Voluntarily, owners can cosign or provide collateral on a business loan. If the business loan falls through, creditors can then go after the owner. Even when it is not voluntary, as this article states, there are times when “piercing the corporate veil”—aka the limited liability coverage—is acceptable. For instance, not all of the corporate formalities were followed; or the owner had too much power, used the company as “a veil” and/or committed fraud.

3. Get Business Insurance

No matter what business entity you have, you need business insurance to protect you from lawsuits and illegalities. For starters, as Inc. indicates, you would benefit from general liability insurance, which covers business-related accidents, negligent claims, and injuries. Other forms of business insurance includes product liability insurance, errors and omissions insurance, and commercial property insurance. It is recommended to consider the product(s) and/or service(s) your business provides, in addition to researching and discussing insurance options with a professional to determine which type(s) would be beneficial for your business.

4. Is My Business Name Available?

You may receive a cease and desist letter if you do not conduct a business name availability search and register a business name that is already taken. While before the Internet it was easier to get away with using the same business name as long as the clientele and services were different, now it’s murky. To be on the safe side, look up potential business names on your state’s secretary of state website. If no other name shows up, feel free to register it, and know that if someone else registers that name after, you have legal grounds to notify them to cease and desist.

Final Thoughts

Getting sued is not uncommon and most likely will happen. Other than contacting your attorney and not communicating with the plaintiff, prevent potential suits from happening by researching intellectual property laws, registering for utility and design patents, conducting a business availability search, and getting business insurance. What other actions can you take to prevent future lawsuits? Leave a comment!

Conducting a Business Name Availability Search in California?

What about Wisconsin? Or New York? Look to Sec State, a database of secretary of state websites that makes navigation easy and user-friendly.

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