The Root Cause of Your Legal Stress as a Business Owner
You know what no one ever talks about when it comes to legal issues in your business? The toll it takes on you mentally, emotionally, and physically.
It turns out that legal stress for business owners is a real thing.
And no, I don’t just mean in situations when someone is threatening to sue or suing you. I mean in all the more common situations where you’re just trying to figure out the law and end up wanting to tear your hair out instead.
So today we’re going to answer one simple question:
Why is the law so stressful for small business owners?
If you’re short on time, I’ll give you the TL;DR version: in my experience, the law is stressful for small business owners because you often do not have a good understanding of what legal risk is.
There are other things like having a basic understanding of how the law works. But the main issue, and the one that creates the most legal stress for the business owners I teach in my courses, is that no one really know what legal risk is or how to think about it.
This isn’t your fault of course. We lawyers love to tell you that you need to protect your business, but we aren’t so good at explaining why.
Let’s see if we can (at least partially) solve that problem today.
In this article we’ll talk about:
What legal risk is;
Why legal risk matters; and
General ways to manage legal risk in your business.
The goal of this article is to familiarize you with the issue of legal risk, how it operates, and how to account for it when you’re making business decisions.
My hope is that providing you with this basic information will reduce your legal stress levels and boost your confidence in your business decisions.
Let’s get started.
So like, what is legal risk?
Legal risk is potential reputational and/or financial loss due to a failure to comply with certain laws and regulations that apply to your business. That can look like failure to comply with certain government regulations that apply to your business, but it can also look like being sued by another business or a customer for violating their legal rights.
So whenever you see lawyers online talking about how to protect yourself this is what they are talking about.
They are talking about the possibility of someone suing you, which includes the likelihood of someone suing you and how much you could possibly be on the hook for paying if someone sues you.
And, they are also talking about what happens if a government agency accuses you of violating certain regulations and requires you to pay financial penalties for those violations.
But here’s the key piece of information that you need to know about legal risk:
You can choose how you want to manage the legal risk in your business.
Yes, read that again. When it comes down to deciding how to manage the legal risks in your business, you have options. I know it doesn’t seem like it because there are so very many lists of “things you MUST do when you start a business” on the internet, but you actually do have choices.
To understand what those choices are, you need to understand the different strategies for managing risk as well as your own risk tolerance.
Let’s start with risk management strategies.
There are 4 ways to manage legal risk in your business.
Usually, when you’re trying to figure out how to manage the legal risk in your business, you will choose one or more of the following strategies:
You can accept the risk of potential reputational or financial losses. An example is choosing not to register your business as a formal legal entity like an LLC. An LLC or formal legal entity helps to protect your personal assets from a potential judgment in a lawsuit. If you don’t create a formal legal entity for your business and you get sued, then your personal assets could potentially be called upon to fulfill a judgment against you.
You can reduce the risk of potential losses. A reduction strategy can look like a limitation of liability clause in a contract that says something like “If you sue me, you can only recover this much money.” This reduces your risk because it places a limit on your potential losses in a lawsuit.
You can transfer the risk of potential losses. An example of this is an indemnity clause in a contract. An indemnity clause shifts the risk of potential losses from one party to the other if certain circumstances are met. If you’ve ever signed a business contract with a larger company, it probably had an indemnity clause in it that transferred some risk from them to you.
You can also avoid the risk of potential losses. An example of this is paying for business insurance. If something goes wrong and it falls inside the parameters of your insurance policy, then your insurance will kick in to cover the potential financial losses. An example of avoiding potential reputational losses is a non-disparagement clause in a contract, which is a clause that essentially says you can’t say anything bad about the business owner or their product/services publicly.
Alright, those are the 4 ways you can manage risk in your business. I If you read those and you’re like “this is all well and good but it’s actually making me more stressed out,” then stick with me.
Because if you’re familiar with my framework for understanding legalese (understand the context, understand the technical, and then apply the context to the technical), then you know that we need to talk about the context of legal risk.
When I say context here, I mean your own personal risk tolerance. As I mentioned before, you have choices when it comes to managing the legal risk in your business. And yes, legal stress comes from not knowing about or understanding what those choices are, but it can also come from not knowing what your own risk tolerance is.
So how exactly do you do that?
Here are a few starter questions to consider:
Are you a licensed professional of some kind? If so, your business likely has a higher risk profile as people are more likely to sue licensed professionals and hold them to higher standards.
Do you handle highly sensitive data like personal customer information as part of your work? If so, you probably have a business with a higher risk profile and you’ll want to consider how to manage it more carefully. Conversely, if you’re a freelance writer and you write food recipe blogs, then your business might have a much lower risk profile.
Do you have a lot of personal assets? I ask because if you own a house, a car, a boat, and other property, then you have a higher risk profile because you have a lot more to lose than someone who maybe just rents their place and uses public transportation. Personal assets include physical property, bank accounts, investment accounts, etc.
What’s your biggest worry from a legal perspective in your business? In other words, is there something in the legal realm of your business that keeps you up at night? If so, this is something you may want to consider creating a comprehensive risk management strategy for so you can relieve some of your legal stress.
While these questions are not and cannot be used as a comprehensive risk assessment that perhaps an insurance broker would perform before issuing you a policy, they can be used to help you think about the potential risks in your business.
As you think about those risks, you can then decide whether or not you’re comfortable with them as they are. For example, I’ve worked with a ton of freelance writers who are happy to be sole proprietors and who have not registered their business as a formal legal entity. They don’t see the need and they’re comfortable with the risk.
But I’ve also worked with consultants who have registered their businesses as legal entities and also carry a business insurance policy because they are not comfortable with risk and want to reduce it and avoid it.
I’ve also worked with coaches who want to make sure everything is above board from contracts, to business insurance, to regulatory compliance like FTC marketing rules because that what makes them feel safe and protected.
To be clear, I’m not saying that you should ignore any regulations that apply to your business. What I am saying is that there aren’t as many things that are non-negotiable as we’re made to believe. There’s a lot of stuff that we can to choose how we want to handle it.
The point is that once you are able to identify potential risks in your business, then you can decide whether you’re fine with them or if you need to manage them by reducing them, transferring them, and/or avoiding them.
Going through this process can significantly reduce the amount of legal stress you experience in your business because it means you’ve taken appropriate steps to manage the risks in your business that you’re uncomfortable with. And it’s something that can often be resolved via a consultation with a business lawyer.
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If you’re a service provider, then check out my free workshop What No One Tells You About Contracts, which dives deeper into understanding risk in contracts and how to manage it.