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Oleg
Potemkin (RA) Hawaii Realty Associates, LLC
Honolulu, Oahu, Hawaii
Direct:
(808) 398-9987 Fax: (808) 538-8081 E-mail:
info@hawaii-realty.com
The
Top 10 Ways to Get Sued-Guaranteed!
Over
80 million lawsuits are filed every year in the United States. If
you are in business, you should be thinking about the risks
involved. The following are some of the most common pitfalls that
lead to liability and lawsuits for small business owners and how to
avoid them.
Pitfall #1:
Doing Business as a Sole Proprietor
Most people who go into business do so as a "sole
proprietor." This means that they are doing business as an
individual or a "d.b.a." (doing business as). This
scenario offers absolutely no asset protection, not to mention poor
tax benefits. If the business is sued, all of the personal assets of
the individual are at risk. For less than $100 in most states, you
can form a corporation to do your business or trade. If properly
maintained, a corporation will shield your personal assets if the
business is sued or goes bankrupt.
Pitfall #2:
Doing Business as a General Partnership
:Doing business with a partner is even worse than doing business
as a sole proprietor. A "partnership" is formed when two
or more people decide to do business together for profit. It does
not require a formal partnership agreement or the filing of any
official documents, although it is often done that way. A
partnership can be created even if the parties did not intend it!
Here is the problem with a general partnership: if your partner does
something foolish, you are liable. That right! If you allow your
partner to commit the partnership to a contract, the partnership and
its partners can be held liable for that debt. If your partner is
negligent or incurs a debt on behalf of the partnership, you are on
the hook - even if your partner files bankruptcy!
If you intend to business with partners, consider a corporation or
other limited liability entity. It is just as easy to set up for two
people as it is for one.
Pitfall #3:
Using a Corporation Improperly
A corporation is good, but only if you use it properly. Many people
pay an attorney up to $1,000 to setup a corporation, then they take
the corporation's minute book and stick it in the closet. A
corporation will not shield you from personal liability if you do
not follow corporate formalities! Even worse, if the IRS audits you,
they can set aside the corporation and hold you personally liable
for the taxes!
At least once a year, have your attorney and/or tax advisor review
your corporate records and practices.
Pitfall #4:
Personal Guarantees
In some situations, such as a bank loan or line of credit, it is
inevitable that you must sign personally. However, it is not
necessary to give a personal guarantee in every situation, simply
because they request it. Often, vendors of your business will
request that you sign a personal guarantee of a corporate liability.
If they are not extending you credit, you should simply refuse. For
example, if a landlord requests a personal guarantee on a lease,
offer a larger security deposit instead. Or, you can negotiate so
that after two years of prompt payment, your personal guarantee is
not necessary.
If you choose to sign personally on an obligation, do not make the
mistake of allowing your spouse to co-sign with you. Unless your
spouse is involved in your business, there is no reason for a vendor
or bank to require your spouse's personal guarantee.
Pitfall #5:
Failure to Maintain Adequate Insurance
Don't be cheap. Insurance will protect you in most
circumstances. If you keep the minimum insurance, increase the
liability limits. You can usually double your liability insurance
for a relatively small amount. Keep in mind that if your insurance
is not adequate to cover the claim, the injured party can go after
your personal or unincorporated business assets for the difference.
Insurance also gives you an attorney in an event you are sued, even
if the claim is settled before trial. The duty of an insurer to
defend (pay for your lawyer) is much broader than its duty to
indemnify (pay for claims against you). Even if the lawsuit is
completely bogus, the insurance company will provide you with a
lawyer, saving you thousands of dollars.
Pitfall #6:
Sexual Harassment in the Workplace
Sexual harassment is another hot issue for the 90's. If you own a
company with employees, be aware of what goes on. Even if you don't
personally engage in any conduct which is harassing in nature, you
can be sued if your company permits a "hostile"
environment. Make certain you have written company policies that are
given to all of your employees that specifically state that sexual
harassment will not be tolerated. Set up an internal complaint and
investigation procedure within your company. Immediately investigate
and resolve any issues within your company, especially those that
involve people of the opposite sex. Be especially aware of these
events if you have a company picnic or office party.
Pitfall #7:
Using "Independent" Contractors
If you regularly pay "contract" employees, you may be
treading thin ice. If your "independent contractor"
commits a negligent act and a third party is injured, you can be
held liable. The problem with this area of law is that it does not
matter whether you thought the individual was an independent
contractor or an employee. The law presumes an individual to be an
employee by balancing some of the following factors:
-
Did the individual
work your hours or his?
-
Did he use your
tools or does he have his own?
-
Does he do work for
other people, or just for you?
-
Did you personally
supervise the work?
-
Did you pay him
daily, weekly or upon completion?
-
Was there a written
contract?
These are only some of
the factors, but you can get a general idea of what factors are
relevant. If the court considers the individual to be your employee,
you are responsible for his actions.
Pitfall #8:
Failure to "Get it in Writing"
Always leave a paper trail. Whenever you speak with someone at a
company, the IRS or any governmental organization, get it in
writing. If they won't give it to you in writing, send them a
"self-serving" follow-up letter summarizing your
conversation. Their failure to object to its contents may be deemed
an admission of what the letter states. Keep a copy in your file in
case to have to prove the oral conversation in court.
Remember, it's not what happens, it's what you can prove in court
(also known as the "O.J. Rule")! The written word is your
most powerful weapon in Court - use it.
Pitfall #9:
Opening Your Mouth too Wide
If you are involved in what could potentially be a lawsuit, think
before you act. Do not write offensive letters to your adversary
stating your legal positions. Successful litigation involves some
element of surprise. State firmly, but vaguely, that you intend to
pursue your legal remedies . . . that's all!
Pitfall #10:
Owning All of Your Assets in One Business Entity
Don't place all of your eggs in one basket. While a corporation
or limited liability company may shield your personal assets from
business liabilities, it will not shield the business's own assets.
If your business entity has a substantial amount of debt-free
equipment or real estate, consider spreading out the risk. Create
one or more corporations or limited partnerships to hold title to
the assets, then have your business lease the assets back.
John D. Rockefeller once said, "Own nothing, but control
everything." The more assets your business owns, the more
likely it will be sued.
About the Author .
. .
William Bronchick, CEO of Legalwiz Publications, is a
Nationally-known attorney, author, entrepreneur and speaker. Mr.
Bronchick has been practicing law and real estate since 1990,
having been involved in over 600 transactions. Visit his site at http://www.LegalWiz.com
Your
Hawaii Real Estate Specialist
Oleg Potemkin (RA) Hawaii Realty
Associates, LLC
4211 Waialae Avenue, Suite 1020,
Honolulu, Hawaii 96816 USA
Tel: (808) 398-9987 Fax:(808)
538-8081 E-mail: Oleg@Hawaii-Realty.com
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