By Cliff Ennico
Without a doubt, hands down, the most common question I get from new clients is: "Hey Cliff, I'm thinking of starting a business, but I'm afraid that if I make a mistake, someone is going to sue me, I will lose my house, and my spouse will divorce me and take the kids. How can I keep from getting sued when I run my own business?"
I discussed two ways that you can keep your risk of lawsuits at a minimum in part one
of this article. Here are three more:(3) Put "Disclaimer" Language in All Your Contracts and Business Correspondence
Every document your suppliers, customers and clients sign is a legal contract. Even some they don't sign are legal contracts as well. Make sure all contracts contain "disclaimer" language.
There are two types of legal disclaimers: "warranty disclaimers" and "limitations of liability".
Whenever you sell something or perform a service for somebody, you make certain warranties about the quality of your work, which will be legally binding if you don't disclaim them. Even if you don't make any warranties about your work, the law will impose "implied warranties" enabling someone to sue you if they are not disclaimed.
Your disclaimer should clearly state that "except as expressly stated in this contract, the undersigned makes no warranty, express or implied, about the products supplied, the performance of services or any other matter." The disclaimer should be in boldface type clearly visible to the reader - burying the disclaimer in the contract's "fine print" won't help you.
A "limitation of liability" disclaimer says that even if you do make a serious mistake, all you have to do is give the client his or her money back, and you're off the hook. He or she can't sue you for anything else.
Make sure your "limitation of liability" prevents you from being sued for "consequential and incidental damages." These are "ripple effect" damages caused by your mistakes. So, for example, let's say you design and sew a dress for a client in the entertainment industry. The dress falls apart during a television appearance. Several audience members take cell phone pictures of the "wardrobe malfunction" and post them on YouTube. The client's reputation is ruined, she can no longer get work, late-night television show hosts are making her the butt of all their jokes, people are Tweeting that she is "the next Charlie Sheen," her spouse divorces her, and she's now living in a diaper box under the Brooklyn Bridge. If you have not specifically disclaimed "consequential and incidental damages," you are liable for everything that has happened to your client if a court finds (as they almost certainly will, since you knew the client was a celebrity) that her damages were "reasonable and foreseeable". (4) (Consider) Transferring Key Assets to Your Spouse or Other Family Members
This isn't for everyone, but if you're just starting out in business, you might want to transfer some key assets (such as your house or an investment portfolio) into the name of your spouse or another family member you trust.
Do not wait until someone is threatening to sue you to start selling your precious antiques for $1 each. The courts will not uphold a transfer if they think it's a "fraudulent conveyance" being made solely to cheat someone. But if you make the transfer before you've done anything to hurt anyone, it should stick.
If the transfer is to your spouse, make sure he or she is not involved in any way in your business. Otherwise, the two of you will be viewed as "partners," and a court will set aside the transfer. Also, make sure you follow all legal formalities. If you are transferring title to your house, record a "quitclaim deed" in the local land office. If you are transferring personal property (such as antiques or cars), have your attorney draw up a "bill of sale" (similar to a deed for real property) and sign it before a notary. Do all the things you would do if you were transferring the asset to a total stranger.
If the transfer is to someone other than your spouse, make sure the person changes his will so that the asset will come back to you if he or she dies. Otherwise, there's a risk that the probate courts will transfer the asset to someone other than you, or (worse) to you and your seven brothers and sisters as co-owners.
And remember : you are making a legal transfer. If you and your spouse divorce, you will not only be without a spouse - you will also be homeless.(5)Don't Do Business with Crazy People
I'm serious. Whenever a client of mine is sued, one of the first things they say is, "I KNEW IT! I knew this person was going to be trouble!" Your gut instincts should always be trusted - if a prospective client or customer behaves in an irrational or highly eccentric manner, or has a reputation of treating people unfairly, he probably is going to be trouble.
You are not legally required to do business with every Tom, Dick and Harry who calls you. If you sense a potential client is a lawsuit waiting to happen, get rid of him. Let him down gently and professionally by saying something like, "I'd really like to help you, but I'm booked solid for the next few months, and I know you need this job done right away."
Then . . . refer him to your toughest competitor.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book and 15 other books. COPYRIGHT 2012 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.