What Are My Chances of Getting Sued?
The threat of a lawsuit is very real: over 100 million cases are filed in US state courts every year. To assess your chances of being sued, the first step is to figure out where you could potentially be liable or otherwise legally and financially responsible. Contract disputes are a very common source of liability for businesses, given that this type of lawsuit makes up about 60 percent of the roughly 20 million civil cases filed every year. Tort cases are another risk area. This type of lawsuit includes slip and fall cases, employment discrimination and even wrongful death suits, making up around 11 percent of civil cases.
Of course, not everyone has the same type and level of risk. Your chances of getting involved in a lawsuit can depend heavily on your exposure. For example, if you have a business store front, it's possible that you could get sued by someone who slips and falls on a wet front step. In contrast, if your business only operates online, you don't have this same exposure. Having employees is another risk factor, as well as signing a large number of contracts, especially if they're complex ones. Even your own success may expose you to lawsuits: competitors could file claims to slow your progress or disgruntled employees could make claims that aren't valid. And valid or not—lawsuits aren't cheap.
What Will A Business Lawsuit Cost Me?
The cost of a lawsuit depends heavily on the cause of action, whether or not you proceed to trial, and if you win or lose once you get there. Pursuing a lawsuit in any capacity can be an expensive endeavor: hiring a lawyer, court filing fees, and discovery—it all adds up fast, and that doesn't even including the trial itself. If the case is particularly complicated or if there are thousands of relevant documents to track down, you can expect the process to take longer and the costs to be higher. If you do go to trial, costs can jump considerably as trial is typically the most time-consuming part of a case. According to courtstatistics.org, median costs for a business lawsuit start at $54,000 for a liability suit, and can reach around $91,000 for the median contract dispute.
Finally, you may incur significant costs if you lose the case and are ordered to pay damages. Contract disputes are typically limited by the value of the contract itself—you won't be getting sued for millions of dollars over a sales deal worth a few thousand. Punitive damages can potentially be significantly larger but are generally not awardable in breach of contract cases save for extenuating circumstances that tie it to a related tort claim, such as fraud. The median judgment awarded for contracts cases is $35,000 compensatory and $68,000 punitively as cited by the Bureau of Justice Statistics study, revised in 2009.
How Can I Protect Myself?
Although there's always some risk that goes along with being a business owner, that shouldn't discourage you. Here are simple ways to protect yourself and mitigate some of the potential damage.
First, incorporating your business (or forming an LLC) can limit any liability to just your business — keeping your personal assets out of the fray. This works by creating a separate legal entity for your business: therefore, the legal responsibilities of your business, including fines and judgments, don't carry over to you. Generally, this means you won't lose any personal property in the event your business can't foot the bill.
Alternate dispute resolution (ADR), such as mediation or arbitration, can be a viable way to resolve issues while avoiding the costs of trial provided both parties agree to it. You can also write provisions into your contracts that require disagreements to be solved through binding arbitration—almost eliminating the chance of going to trial. Other methods also include carrying insurance for your business and simply avoiding trial by negotiating a favorable settlement.
Keep Good Records
And finally: keep good records. In the fast moving world of handshakes and verbal contracts, not everyone takes the time to enshrine day to day deals in writing; however, there's nothing like having well-documented facts on your side to prove your argument or to avoid conflict all together. Beyond litigation, having everything in writing can help you prepare financial statements and taxes, and simply stay more organized. Be it invoices, contracts, or any other agreement, if it's important you should consider getting it in writing.
Remember, a trusted business lawyer can be an entrepreneur's greatest asset. If you have any specific questions or concerns, ask a lawyer.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.