Why teach business law to undergraduates? One reason (perhaps the reason) is to make them aware of the basic concept of “legal risk.” Business firms of all shapes and sizes confront a wide variety of legal risks every day. If these risks were to occur, they could cost the firm a lot of money and a loss of goodwill. Here are three major legal risks every firm (and person) must deal with:

1. Risk of Litigation. A firm could be sued–by the government, by its customers, by its employees (or former employees), by its contract partners, by its owners, and even by third parties who were injured by the firm’s products. Defending a lawsuit (or initiating one) costs time and money, and the outcome of a case will always involve some level of uncertainty.

2. Risk of Legal Liability. There is not only a risk that a firm could be sued; there is also a risk that a court or regulatory agency could impose civil or criminal liability on the firm if the firm has breached any legal duties or broken any laws. The most common examples of civil liability are torts and breaches of contract. Examples of corporate criminal liability include such misconduct as bribery, fraud, and tax evasion. As a result, sometimes firms prefer to settle out of court than take their chances at trial.

3. Risk of Reputation Loss. Regardless of the outcome of any business litigation, a firm’s reputation could suffer if it is accused of legal or ethical misconduct or is otherwise involved in litigation, either as a plaintiff or a defendant. Just ask Mark Zuckerberg!

credit: salmanoup