Lawsuits can be scary. They have the power to bankrupt businesses and individuals alike. A lifetime of saving and work can all be taken away in a very short timeframe, leaving business owners with nothing to show for their efforts except for a mountain of debt. Fortunately, there are steps you can take to prevent a business lawsuit from financially ruining you.

Create an LLC

If you’re the sole owner of your business, you may have started out as a sole proprietor. The problem with this is that you and your business are considered to be the same entity. If someone files a lawsuit against your business, they’re effectively suing you personally. Organizing your business as an LLC, on the other hand, offers liability protection and creates a business entity that is separate from the business owner. To form an LLC, you’ll need to register at the federal, state, and probably local level. You will need to apply for a federal EIN to register the company. State and local registration depends on where your business is located, so make sure you research the regulations you need to observe.

Buy Insurance Protection

Just structuring your business as an LLC may not provide enough protection. To that end, it may be wise to consider purchasing additional insurance protection to protect your business interests. As with all insurance, there are different options and levels of protection. All of them have their merits, but they may not all be necessary for your business. Weigh the costs of insurance against the benefits they offer and the risks you’re likely to face.

Document Everything

They say the best offence is a good defense. This can apply to lawsuits as well. Keeping careful records of NDAs, signed policies, conflict resolution procedures, and various other contracts signed by employees and clientele can be invaluable in your defense. Maintain logs of regular maintenance and repairs that are done to show that you’ve done your part to make your business a safe place for people to be. If incidents occur, keep meticulous records of the incident and the events that follow. These documents could make the difference between financial ruin and staying in business.

The prospect of losing everything to a lawsuit, regardless of how valid or frivolous it is, can be frightening. Fortunately, there are measures you can take to reduce the risk of financial ruin. Make sure your business structure offers protection, purchase additional insurance protection as needed, and be sure to document everything as you go. This way you stand a better chance of avoiding bankruptcy and staying in business.

Want more tips on how to run your business? Try some executive coaching!

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