Small business owners need to be familiar with risk management. Owning and operating a small business involves a certain level of unpredictability. In spite of your best efforts to stay on top of supply chains, marketing, sales, competitors, employees, and cash flow, unforeseen issues can throw you off your game. You have survived plenty of bumps in the road and come out stronger than ever. But are you ready for the financial impact—not to mention the stress and emotional impact—of a lawsuit?
You should be, according to the numbers. As you know, we live in a very litigious society (“It’s not my fault, it’s yours”) and in any given year, roughly 50% of small businesses face the threat of litigation. For larger corporations that can afford in-house legal counsel, lawsuits are just the cost of doing business. But for smaller companies, a lawsuit might be too much for the company to be able to handle.
Small Businesses Bear a Disproportionate Litigation Burden
A Small Business Administration (SBA) survey found that an estimated 36-53% of small businesses are involved in civil litigation each year. The cost to businesses originating from litigation increased from $300 billion in 2016 to $343 billion in 2018, according to the Institute for Legal Reform (ILR). The ILR also found that smaller businesses have a higher liability burden than larger businesses. Those with less than $1 million in annual revenue carried 39 percent of the liability costs, as compared to businesses with more than $50 million in revenue, which carried 37 percent. Even though the overall percentage is comparable, on a per-dollar-of-revenue basis, the litigation cost liability is ten times higher for the smallest businesses.
Every dollar spent on litigation is a dollar that cannot be spent on hiring, growth, or new products and services. Lawsuit costs can even be high enough to threaten the solvency of a business. According to the SBA, the cost of litigation for small businesses ranges from roughly $4,000-$5,000 up to more than $200,000 (in 2021 dollars).
Why Small Businesses Get Sued
Lawsuits brought against small businesses can stem from a range of claims, including contracts, personal injuries, civil rights, and wages. Generally, these disputes fall into one of three buckets: customer disputes, employee disputes, and disputes with other businesses.
Dealing with disgruntled customers is nothing new for business owners. But a simple disagreement could turn into a legal dispute in some instances:
While around 80%of small businesses don’t have employees, the other 20%employ nearly 60 million Americans—almost half of the entire workforce. Employer-employee legal disputes often involve the following types of issues:
Small businesses count on other businesses up and down the supply chain. This can lead to disputes over a range of issues, including:
Business Lawsuit Protections
The United States has the most costly legal system in the world as a percentage of its economy. ILR data shows that the small businesses that can least afford litigation costs are the ones that pay the most.
Not all litigation is frivolous. But at the end of the day, a lawsuit, whether deserved or not, could cost your small business everything. You can protect yourself and your business from the ever-present threat of legal action by taking the following steps:
As the owner of a small business, you cannot control everything. Most owners should anticipate at least one lawsuit over the life of their business. However, with careful planning, you might be able to beat the odds by taking steps to minimize risks. At the very least, a lawsuit mitigation plan can help your business avoid a legal threat. For help with your lawsuit risk mitigation strategy, please contact us.