Bill Bronchick

Top Ten Ways to Get Sued - Guaranteed!
by Bill Bronchick

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.

Bill Bronchick
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. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who's Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.

Bill Bronchick Products (9)
CoursesHow to Create a Bulletproof Corporation
CoursesHow to Create Your Own LLC and Family Limited Partnership
CoursesStep by Step Guide to Land Trusts
CoursesUltimate Guide to Buy and Hold
CoursesUltimate Guide to Fix and Flip
CoursesUltimate Guide to Owner Financing
CoursesUltimate Guide to Wholesaling
SpecialsWealth Protection Library
CoursesWealth Protection Strategies

Copyright Notice
Copyright 2002-2020 All Rights Reserved. Published with Permission of Author. No part of this publication may be copied or reprinted
without the express written permission of the Author and/or

Back to Top

Free Newsletter

Article Options
Printer Friendly Page
Send This to Friend

Author's Articles
10 Easy Tips for Finding Investment Properties
10 Inexpensive Ways to Spruce Up Your Rental or Rehab Property
60 Days To Your First Bargain Purchase
7 Real Estate Contract Buyer Clauses Checklist
7 Reasons to Use a Land Trust
7 Ways To Buy Foreclosure Property
9 Goal Setting Tips For Real Estate Investors
9 Mistakes New Real Estate Investors Make
A Review of the National Consumer Law Center
All About Property Disclosures
Apartment Investing - Investors Now Is the Perfect Time!
Are Real Estate Seminars Worth the Money?
Are You a Newbie at a Real Estate Club?
Are You Clear On What is a Good Deal
Are You Waiting on the Sidelines?
Bankruptcy, Foreclosure, & Credit - How it Affects You
Bankruptcy, Foreclosure, & Credit - Part II
Basics of the Real Estate Contract
Be a Smart Investor... Do the Math
Big Brother Is Watching You, New (Bad) Legislation Coming Your Way
Bubble, Schmubble - Flipping Works in Any Market
Bull vs. Bubble
Bulletproof Your Wealth with Family Limited Partnerships and LLC's
Buy A House - Get Thrown in Jail?
Buying at the Foreclosure Auction
Collecting Money Owed by a Tenant
Common Investor Legal Mistakes
Common Sense Mortgage Tips
Contents of a Good Short Sale Package
Contract for Deed
Create Monthly Cash Flow Without Any of Your Own Money or Credit
Dealing with Real Estate Agents
Dealing with the Dealer Issue
Dealing With the Due on Sale Clause - Part II
Do You Need a License to Flip Real Estate?
Equity Sharing & Partnerships
Essential Contract Clauses
Essential Contract Clauses II
Explaining Foreclosure Options to the Homeowner
Five Big Mistakes Newbies Make
Flipping Properties for Cash Profit
Flipping Versus Holding - Which is Better?
Get That Property Out of Your Name!
Getting Started as a Real Estate Entrepreneur
How Much Cash Should an Investor Keep in Reserve?
How to Create a Real Estate Cash Cow
How to Determine Property Values in Today's Market
How to Get a Hard Money Loan
How to Save Up to 90% on Title Insurance
HUD Properties, FHA & Title Seasoning
Illegal Flipping and Lender Seasoning
Investing in a Changing Market
Investing Outside of Your Local Area
Investing Strategy - Master Lease Option for Apartments
Keep a Positive Perspective in a Negative Market
Know Your Real Estate Laws
Learn the Landlord-Tenant Rules!
Lease Option a Junker!
Lease Option Tips & Strategies
Lease/Option 101
Lease/Option vs. Contract for Deed
Lease/Options & the Equitable Interest
Mortgage Broker vs. Mortgage Banker
Non-Income Verification Loans
Owner Financing Mechanics
Personal Property Trusts
Real Estate Investing Financing 101
Real Estate Investing is Just Like Weight Loss
Reduce Taxes By Investing In Real Estate
Risks of Buying Real Estate in Emerging Markets Out of State
Scripting Common Objections from Foreclosure Sellers
Setting Your Financial Goals
Seven Ways to Flip a Property
Should the Government Bail Out People in Foreclosure?
Should You Disclose on Short Sale Flips?
Should You Do Real Estate Full-Time?
Should You Use an Attorney's Fee Clause?
Tax Issues on a Subject 2 Deal
Tax Lien Investing 101
Ten Myths Preventing People from Succeeding in Real Estate Investing
The Basics of "Short Sales"
The Bona Fide Purchaser
The Ethical Real Estate Investor
The Forgotten Owner Carry
The Mortgage Elimination
The New Limited Liability Company
The Not-So-Handy Man's Guide to Fixing and Flipping Properties
The Property Recording System
The Role of Insurance in Asset Protection Planning
The Wrong Way to Invest in Real Estate
There is No Due on Sale Jail
Top Ten Ways to Get Sued - Guaranteed!
Understanding Loan Terms
Understanding The Mortgage Loan Market
Using A Home Equity Line Of Credit To Buy Properties
Using a LLC IRA for Real Estate Investing
Using Facebook as a Real Estate Investor
Using Trusts for Personal & Business Privacy
What Every Landlord Should Know About Discrimination
What to Do if a Tenant Abandons the Property
What You Need to Ask Before Joining a Coaching Program
Where to Incorporate: The Answer May Surprise You!
You Have to Sell a House to Get it Sold
Zero In On Motivated Sellers

Author's Products

How to Create a Bulletproof Corporation

How to Create Your Own LLC and Family Limited Partnership

Step by Step Guide to Land Trusts

Ultimate Guide to Buy and Hold

Ultimate Guide to Fix and Flip

Ultimate Guide to Owner Financing

Ultimate Guide to Wholesaling

Wealth Protection Library

Wealth Protection Strategies