Free enterprise is the essence of the American Dream. Since the discovery of the New World, brave souls have journeyed to America to escape economic tyranny and build a better life for themselves and their families. Many people dream of starting their own business, whether it’s a consultancy, a start-up venture, or a convenience store. While becoming the master of your own destiny is something to celebrate, it is not free of risk for new entrepreneurs.
Coupled to the American essence of free enterprise is the way in which our legal system works. English Common Law, upon which much of the American legal system is based, fosters a more adversarial system than its European counterparts. In this way, you can think of our legal system as decentralized in a sense–attorneys in our system function as private agents who serve your best interest, not the interest of the state. As a result of our system’s design, the bar to getting sued in America is very low. As long as a case is not completely frivolous, an adversary may sue you without getting in trouble. Worst of all, even if you win the suit, you usually still have to pay for your own legal fees.
Business lawsuits are a fact of life for business owners. Whether it’s a contract dispute, an employment dispute resulting from an alphabet soup of federal rules, or a simple misunderstanding, it’s important to build a plan that protects yourself as a business owner. The best way to do this is to take steps to protect your personal assets. If you do not take the adequate steps to bifurcate the operations and finances of you and your business assets, an adversary may attempt to “pierce the corporate veil” as we say in business law. This means they argue that your business is a sham; that it’s been you all along.
Use a Lawyer
LegalZoom is great for spending a little bit of money now and a lot of money later. The formation of your business is not the time to start cutting corners on your foundational documents. If you do not take into account all of the factors needed to shield yourself from liability, you could lose big time. Work with a lawyer to file your entity and draft the correct papers. As a new business owner, you “don’t know what you don’t know,” at least not yet. ESQx will help you put together a 10-Step New Business Checklist to walk you through these foundational elements.
Create an Entity
There are many options for what type of business you can form, but generally people file limited liability corporations (LLCs) because, from a legal perspective, they are a nice hybrid of sole proprietorships and corporations. You can also file a limited partnership (LLP), or a corporation, depending on your needs. Failing to take these precautions, and simply working as a sole proprietor allows adversaries (creditors, opponents, envious competitors) to personally attack you and potentially seize your assets through litigation. Don’t let this happen to you.
Keep Finances Separate
One of the major things adversaries will do in litigation is pull bank records. If they see you are using a personal account for your business, this is a major piece of evidence against you. Not only does having a separate bank account simplify your taxes, it gives you piece of mind that you aren’t mixing business and personal funds. It costs almost nothing to set up a bank account. What are you waiting for?
There are a zillion things that can go wrong at your business, need I count the ways? Ed, your slothen manager, slips on a banana peel because he can’t see his own feet. Dorothy, your ex-secretary, goes “#metoo” because she didn’t like her Christmas bonus. Your supplier’s ship sinks off the coast of Tripoli and sues you when you don’t pay even though you didn’t receive the product. This stuff happens all the time.
Even if you do prevail in a lawsuit, attorney’s fees add up quickly. When you have insurance coverage, you engage with a trusted company to help you shoulder the costs if things go wrong. Yet, it’s not enough to simply “have insurance” because there are a myriad of types. Ask yourself a few questions about the policy:
- Does it cover errors and omissions?
- Does it cover slip and fall accidents?
- What about employee disputes?
- Product liability?
There is no one-size-fits-all approach to insurance. Having an attorney helps you tailor the policy to your business’s needs.
If you’re going to take your business seriously, you should also take your personal assets seriously. Don’t let adversaries come after you. You’ve worked hard to get here. Let’s keep you safe.
ESQx can help guide you to success.