Businesses are very vulnerable to lawsuits, especially small businesses. One out of three small businesses is threatened with litigation each year. Altogether, they spend over $100 billion on legal action. If you want to protect your business from getting sued or being threatened with a lawsuit, you need to be informed about some of the most common legal issues businesses face. That way, you’ll know how to avoid getting into any legal trouble in the future.
Having an undefined business structure
Every business needs a clear and defined business structure. Most businesses fail to do so. This is usually the case for start-ups and first-time entrepreneurs. Having a defined business structure is necessary. It can affect the success rates of your business. It explains who is in charge of a particular task and is responsible for its results. There are four common business structures:
Sole proprietorship: A single person handles the entire company’s profits and debts.
Partnership: Two or more individuals are responsible. They can share responsibilities equally (general partnership). One individual can have more control, while the other contributes and gains a percentage of the profits (limited partnership).
Limited Liability Company (LLC): Has one or more owners that don’t have to divide responsibilities equally. Enjoys liability protection that corporations have without double taxation.
Corporations: More complicated and not ideal for start-ups. It is a separate entity from its owners.
If you need advice on which legal structure is best for your business, you can seek a business lawyer’s help. They can also give you advice on any of the other legal issues mentioned below.
Not having a proper shareholder’s agreement
Even if you fully trust your business partner, you can’t rely on a handshake to settle certain decisions. You must make it a rule to document and have everything down on paper. That’s where a shareholder’s agreement comes in. A proper shareholder’s agreement should clearly state:
- The rights and responsibilities of each shareholder
- Who is going to run the company and how?
- Who handles important business decisions?
- What should happen if one of the shareholders decide to leave
You have to specify whether your employees are full-time, part-time, or temporary employees. You also have to determine whether they are exempt or non-exempt employees. That is because the FLSA has specific laws about wages. Such as full-time employees must be paid for overtime if they exceed a certain number of hours at work.
Full-time employees are usually those that work 40 hours a week. Part-time usually refers to those that work irregular hours. The benefits of a part-time employee should be somewhat the same as full-time employees. But it is up to employers to define other terms in the employment contract.
This refers to patents, trademarks, and copyrights. Intellectual property can be a very tricky issue. Everything from the name of your company, logo, and color use can be considered intellectual property. If you don’t protect your intellectual property, other businesses might end up copying or stealing your ideas.
Termination of employment
Letting go of an employee can go sideways if not handled properly. If you want to avoid getting sued for wrongful termination or unlawful dismissal of an employee, you need to secure a notice of termination. Instant dismissals only occur in the movies or when an employee has done a very grave offense such as fraud, theft, or assault. The reason for termination must be clearly stated.
This can refer to discrimination of gender, ethnicity, or age. And can be done by past, current, or even prospective employees. If you want to avoid being sued on these grounds, cultivate a culture in your business that embraces diversity. You should also have an Equal Opportunities and Anti-harassment Policy at work.
A little healthy competition is good. But if you resort to trash-talking, this can be grounds for a lawsuit. You could be sued for libel.
Failure to protect customer data
Just last year, there was a 273% increase in data breaches from 2019. Big companies such as MGM Resorts, J-Crew, and T-Mobile all suffered data breaches in 2020. However, the companies themselves can’t be sued for the data breach since it wasn’t entirely their fault. You can be fined thousands of dollars for not protecting your customer’s data.
You can never predict when a lawsuit might come your way. That is why you must do what you can to prepare and prevent it from happening. Always remember to take a record of things and in writing. Contracts are essential, no matter how small you think the deal is. You should also have an emergency fund specifically for legal issues. And don’t forget to get insurance.