How to Avoid Lawsuits: A Guide For Canadian Business Owners

How to Avoid Lawsuits: A Guide For Canadian Business Owners

DISCLAIMER

This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision. 

In this article, we’ll cover the following topics:

• How to protect your business from lawsuits

  • Overcommunicate

  • Shareholders’ agreements

  • Corporate structure

  • Holding companies

  • Appropriate contracts

The saddest thing about getting sued is that it’s almost never your enemies who sue you. It’s the people closest to you and your business – your business partners, your customers, your employees, and your suppliers. It’s the people who have been instrumental in the success of your business, until one day, something suddenly went wrong. 

Fortunately, there are many steps you can take to avoid being sued. As you read this and learn about these steps, you may notice a common thread connecting them all, and that is clarity.

Let’s look at a few ways to avoid lawsuits by fostering clarity in your business relationships.

What are the best ways to avoid lawsuits as a business owner?

overcommunicate

The more you communicate, the further you distance yourself from potential lawsuits. Be radically transparent about your business and the nature of the agreements you’re entering into (within reason, of course). Sometimes it may feel uncomfortable to overcommunicate, but the truth is that doing so won’t just protect you from lawsuits; often it will improve the success of your business. 

I’ve seen some nasty shareholders’ disputes in my days as a business lawyer. Nearly all of them could have been avoided, had the founders been more communicative with one another from the get-go. 

Don’t be like those founders. Communicate clearly, and communicate often. 

Shareholders’ Agreements

For a proper understanding of shareholders’ agreements, you’re better off reading “Why Every Canadian Business Needs a Shareholder Agreement,” but the gist is that they provide clarity – there’s that word again – to firstly avoid and if necessary navigate complex legal disputes, thereby affording you and your business more protection from lawsuits. 

A well-written shareholders’ agreement will anticipate a number of problematic things that may occur in the lifespan of a business – death of a business partner, a divorce, bankruptcy, a deadlock, disability of a shareholder etc. – and then outline a way forward. With a shareholders’ agreement, the decisions that need to be made, and the people who must make those decisions, will be crystal clear. 

Corporate Structure

In “Benefits of Incorporation for Canadian Businesses: Everything You Need to Know,” we discussed why incorporated businesses are generally more protected than sole proprietorships. Incorporated businesses are, technically speaking, separate legal entities, whereas sole proprietorships are one and the same with their owner. In other words, if you’re a sole proprietor, then you are personally liable for all of your business dealings, including the ones that go sour. 

Most small business owners won’t incorporate until they feel that the business has momentum, and that’s OK. But whenever that time comes, incorporation should be at the top of your agenda, followed quickly by opening a holding company. 

Holding Company

For an in-depth look at how holding companies protect you from lawsuits, read “4 Ways Canadian Business Owners Can Benefit From Using a Holding Company.”

The TL;DR is that holding companies put distance between your company and your company’s money, without you losing control of that money or needing to pull out all surplus capital from your operating company to your personal account (resulting in unnecessarily high tax bills). If your company was slapped with a lawsuit, every cent of the money in your corporate bank account could be at risk – unless you have a holding company.

Insurance

This one’s a no-brainer. Having strong general liability insurance of some kind, or perhaps errors and omissions insurance, is going to be incredibly valuable to your business. If you do find yourself in the middle of a lawsuit, proper insurance should cover the incident in question. 

Appropriate Contracts

As we’ve already discussed, a shareholder agreement is the perfect example of a contractual document that will provide clarity in your business, thereby affording you increased protection from lawsuits. 

Beyond that, you’ll also need to have clear contractual agreements with your employees, contractors, clients, and suppliers. In a perfect world, everyone who touches your business will be held to an agreement of some kind. The same goes for anyone you license your property to - protect yourself with licensing agreements. 

As early and as often as you can, get clarity, and get it in writing. More clarity equals more protection from lawsuits – and the cherry on top is that more clarity also leads to more business success.

Want to learn more about protecting your business from lawsuits? We’re here to guide you, whether it’s help with drafting contracts, creating holding companies, incorporation, and more. Contact us today using the form below.