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Small Businesses Face $86 Billion in Legal Costs. Really!

Posted by Thor Roundy | Oct 05, 2015 | 0 Comments

I never worried about being sued.  Actually, I never worried about being sued for something I did wrong.  But I am aware of the statistic, that one-third of small business owners will be sued or threated with a lawsuit.

(See the entire "How High Is Your Risk?: Small Business and Lawsuits" infographic in our resources.)

The cost of being sued can be shocking.  Even when you haven't done anything wrong, you have to pay an attorney to represent you.  Spending over $10,000 in a single week is common.  And when you consider that a lawsuit can last for years before the case goes to trial, the statistic in the headline makes sense.  Companies with under $1 million in revenue spent $86 billion on lawsuits in 2011.

I have built to help protect small business owners from lawsuits.  The first question that I have for a small business owner is, “What is your legal health, right now?”  I assess that legal health with 5 general questions.

1.   Have you created a legal entity for your business

A legal entity provides so much protection for a business owner.  Whether you set up a corporation or an LLC, there are laws that limit lawsuits against legal entities and their owners.  It is harder to sue a company than a person.  It is also harder to collect a judgment against a company.   Whether you own a business or work for a business, you should demand the protection of having a legal entity.

Legal entities have other benefits, too.  There are tax advantages for certain company types.  Having a company can give you access to more resources.  Having a company is the foundation for creating a brand.  If you haven't created a legal entity for your business, it tells others that you don't have experience operating a business.

2.  Do you have written agreements with co-owners, employees, vendors and others

Last week I was hired by a client that made a $445,000 loan to a stranger without a written agreement!  Years ago, I had a client loan $1,000,000 to a neighbor without having me look at their one-page hand-written agreement.  Do you think they lost money?

Trust is an important part of doing business.  We don't ask people for written agreements because we trust them.  If we didn't trust them, we wouldn't be doing business with them.  There are two reasons why written agreements are vital to good relationships.

First, the exercise of creating a written agreement causes people to talk about what their agreement is.  It makes people commit to what they will do.  Did I really agree to show up for work at 8:00 a.m., or can I come in whenever I want as long as I “get my work done”?  It makes people think about the future.  A useful question that business attorneys ask is, “What will we do if this happens?”

Second, when something goes wrong, a written agreement gives us protection.  When a loan isn't paid back on time, a written agreement tells me that I have a right to collect it.  It tells me if I have the right to take property as security to ensure that I get paid.  Everyone intends to pay back the loan (or do whatever else they agreed upon), but business plans don't always unfold the way we planned.  Without a written agreement, you take the risk in every relationship that you will be holding the bag when things take longer or cost more.  Don't leave yourself in a position where you can't solve a problem without a very expensive lawsuit.

3.  When you have a legal questions, who do you ask? 

For nearly 10 years, I had a small business client who called me every time he made a major business decision.  Before he fired an employee, for example, he would call to discuss the reason; and I would advise him about the proper procedure to follow.  His monthly legal bill averaged $500. Not much for peace of mind. At that time, he had succeeded in part because he knew who his resources were and when to utilize them. Very smart.

One year he ran into a problem with his major supplier.  For some reason, he didn't call me.  He started losing business, and for some reason he still didn't call me.  I found out about his financial problems after someone sued him.  He stopped giving me the whole truth about what was happening, and I told him that I couldn't represent him anymore.  Within two years, he was out of business.

Your relationship with an experienced attorney can be the difference between a smart business owner and a failing business.  Some attorneys also run their own businesses, as I do.  All good attorneys have advised dozens of clients about how to deal with difficult problems.  Just like we consult doctors about our physical health, we can consult attorneys about our legal and business health.

4.   How do you resolve complaints, conflicts and concerns

Have you ever threatened someone with a lawsuit when they don't pay their bill?  Has anyone threatened to send your account to collection?

Frequently, threats are counter productive.  Collection companies don't have any teeth.  If a lawsuit is the only way to force someone to pay a bill, then file the lawsuit and save the other costs of collection.

Before I file a collection lawsuit for a client, I teach my clients about the proper way to collect an outstanding account.  I once had a client with $20,000 in outstanding invoices owed by 18 clients.  He collected $18,000 himself using just a collection plan I crafted for him.  After two months, he had only one client who failed to pay.  I sued the last client and collected the balance owing plus my attorney fee.

The true role of a good attorney is to be a problem solver.  I've been in business long enough to have resolved hundreds of issues. Before you ruin a good business relationship, talk to an attorney you can trust about how he would handle the situation.  Lawsuits have their place, when easier options fail.

5.  What types of insurance do you have

If insurance is available for your type of business, you should seriously consider having enough insurance to cover the attorney fees that you might incur in a lawsuit.  $100,000 in coverage may seem like a lot … until you are actually sued.

And if you are sued, make sure that you watch how your insurance company spends money on a lawyer.  Don't let the lawyer assigned to your case spend your insurance coverage without your input. Not all insurance company lawyers are sensitive about their charges.

As I said at the outset, I don't worry about being sued for anything that I may do wrong.  I am good at what I do.  But I can't control the filing of a frivolous lawsuit or the actions of an unscrupulous attorney.  I like having insurance protection against the high cost of a lawsuit.

EVN Law has the Answers.

EVN Law, LLC is expanding to serve more small business owners, because a good attorney can save your business.  There is a need for our advice, and we want to be there for you.  I have more than 20 years of experience advising clients. I know how important the attorney-client relationship is to a small business. I have also owned multiple businesses so I understand the needs of a small business owner. I created EVN Law to help you succeed.

If we don't have an office in your city, call us for help finding someone that you can trust.  With LinkedIn and other social media outlets, building relationships to help your business just makes sense.

About the Author

Thor Roundy

Founder, President, and Attorney


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