How To Prevent Business Lawsuits

After over 30 years of seeing people face business lawsuits in Chicago, Wheaton, Waukegan, Joliet and other cities, we have some thoughts on how to prevent them and how to facilitate business.

Deal refers to the negotiation and creation of business contracts, corporations, partnerships, limited liability companies, agreements related to those business entities, estate plans, trusts, commercial leases, reports, and required governmental filings.

An ounce of prevention is worth a pound of cure. Before going into business, you should decide the type of business entity that is right for you: sole proprietorship, partnership (general or limited), corporation (S or C), or limited liability company (LLC). A corporation or LLC reduces your risk of loss and protects your personal assets, but you must observe corporate formalities or this protection will be lost. Analyze carefully your insurance coverage.

Look before you leap. Before entering into contracts, have them reviewed by a lawyer. Ensure that you are aware of the relevant terms. We are amazed at the number of people who are surprised to learn that their contract (a) requires any dispute to be settled in a state other than Illinois, (b) eliminates the right to a jury trial, (c) curtails the amount of money damages that can be recovered upon a breach, (d) provides for one party to pay the other’s attorney fees in the event of a breach, (e) sets up an unrealistic payment procedure, or (f) gives discretion to one party whether and how to perform. These are just a few examples.

Treat your friends as if they might someday be your enemies. A hard and cynical piece of advice, but worth millions of dollars in bruised feelings, attorney fees, and lost opportunities. It is a scandal how many people get into business with their friends and fail to agree on who is taking what risks, what each is contributing to the business, what will happen if it succeeds beyond their dreams, or what will happen if it fails or if someone dies or gets divorced. Fellow shareholders should have a shareholders’ agreement. LLC members need an operating agreement. These items should be reviewed and updated regularly.

Run a first class shop. Do you have policies and procedures, contracts for your employees and standard form contracts for suppliers and customers? Professional legal documents not only protect you, but give you a first class image.

Be prepared. As an Eagle Scout, Tom Patterson learned this mantra as a boy. In business, no one likes litigation, but everyone should be prepared for it. Know your risks and how to minimize or avoid them. If you are scared of litigation, people will take advantage of you. If you are litigious, you will get a bad reputation and make your lawyers rich. President Kennedy had good advice: "Let us never negotiate out of fear, but let us never fear to negotiate." So did President Theodore Roosevelt: "talk softly but carry a big stick."

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