Put it in writing
He said, she said can lead to legal actions. Always use contracts and agreements to formalize arrangements between you and your vendors, customers, and employees.

In addition to spelling out the terms of your understanding, include appropriate details about how disputes will be resolved. If, for example, you contract with a vendor in another state, negotiate as part of the terms of the agreement that your state's law will be used to resolve contract disputes. You may want to provide for alternative dispute resolution (mediation or arbitration) in some situations.

You can draft your own agreements using online tools designed for this purpose. Resources include: Free Legal Documents; Legal and Business Forms; and Lectric Law Library. However, be sure your attorney reviews these drafts before you sign anything. By using a generic form, you may easily overlook an important point for your situation, and the cost of the attorney's fee is well justified in this circumstance.

Don't ignore customer complaints
Simple complaints can turn into costly lawsuits if you don't respond promptly and resolve issues to the customers' satisfaction (to the extent possible). Customers who are ignored or badly treated may sue on principal rather than for any loss of money or property. Sometimes, a simple apology may be all that is needed to avert legal action.

Follow company policy (and the law) in handling employees
During this recession, you may have been forced to lay off workers. Ex-employees, whether terminated during tough economic times or at any other time, may be itching for a fight. Be sure to establish a written employee manual that is given to an employee upon hire (make him or her sign a statement that the manual has been read). Then, follow procedure when giving warnings and during the firing process. Be sure to set up sexual harassment procedures and follow through on employee complaints to avert cases of sexual harassment. This can avoid cases for wrongful termination, discrimination, sexual harassment, and other employee actions against you.

Document everything! The better your paper trail, the less likely you are to get sued (because you can prove that you followed procedure); and if you do get sued, the greater your chances of settling early or ultimately prevailing.

And if you do get sued
Think ahead. Set up your business entity to protect your personal assets; use a corporation or limited liability company (LLC) for this purpose.

Obtain insurance now that can protect you in case of legal actions. Having insurance does two things: It automatically provides an attorney from the insurer to defend you and it pays for awards (up to the limits of your policy) if you lose.

You can't insure against all contingencies, but you can obtain:

• A business owner's policy (BOP) that includes liability protection in case someone slips on a banana peel on your premises.
• Employment practices liability (EPL) coverage for employee actions against you.

To learn more about insurance for your small business, go to Insure U for Small Business.