The mere thought of an audit or a lawsuit strikes abject terror in the hearts of most small business owners. No one wants to find their business the target of an IRS audit – in fact, most of us shudder at the mere mention of the phrase. Lawsuits are also frightening prospects. Yet small businesses and entrepreneurs frequently leave themselves open to failing audits and losing lawsuits by not taking steps to prepare or plan for them.



Scary Fact #1: A study released in March of 2007 estimated that U.S. citizens pay about $865 billion every year in expenses related to lawsuits. A significant amount of these lawsuits are brought against doctors and other professionals. But a sizeable amount of this cost is tied to suits brought against small businesses.

Small businesses and entrepreneurs are particularly susceptible to lawsuits because they are often so focused on starting and growing the business – often with a minimal staff – that they just don't get around to doing the paperwork needed to protect their businesses and their personal assets. Further, many believe that a business license and articles or incorporation, articles of organization or partnership agreements are the only documents they need in order to do business.

Depending upon the state in which your business is located, this may be sufficient to allow you to do business. But it is woefully inadequate to protect your business.

Scary Fact #2: If you didn't form and structure your business correctly, your personal assets could be at risk in the event of an audit or a lawsuit. Incorporation is a great thing, as is formation of a partnership. Without proper structure and continued documentation, the business is susceptible to disallowed deductions and personal assets are well within the reach of those who bring lawsuits.

Business structures cannot prevent audits or lawsuits. But S Corporation or C Corporation and Limited Liability Company structures do allow you to separate your business and your personal assets and offer liability protection. The same is true of Limited Liability Partnership. You have worked hard for your home and your possessions, not to mention your savings and retirement plans and investments. Don't risk losing everything because your company isn't structured correctly.

Scary Fact #3: Many small businesses and entrepreneurs fail to properly and adequately document decisions, agreements and business activities. This failure puts the entire business at risk. You must record business decisions and summarize them in your Annual Meeting. If you don't, your notes will not stand up in court.

Every agreement made by a business needs to meet three criteria:

1. It should be in writing.

2. It should clearly state how disputes will be resolved.

3. It should be reviewed by an attorney before it is signed.

Finally, ensure that every product you release and every property you own and use for business carries appropriate warnings, disclaimers, and the like. No matter how much we might like to think otherwise, we live in a society in which people are more than ready to take others to court if they think they will gain financially. Once a lawsuit is brought, your legal fees begin to accumulate. Even if you win, you will incur significant financial loss.

Copyright (c) 2007 Juli Walsh