7 Tips for Avoiding Small-Business Legal Potholes
Even the most successful business can be undermined by poor legal arrangements. Failing to plan for the possibility of lawsuits or other problems may come back to bite you at the worst possible moment.
Here are seven tips for reducing your odds of hitting a legal pothole.
1. Avoid loose language and understandings. Doing business with friends, family, and lovers is a common practice for small-business owners. But the strength and depths of those relationships should not prevent you from signing a detailed yet flexible partnership agreement. With other types of partners, the need for such agreements is even greater.
All owners of a business should agree in writing on such issues as:
- Each partner’s time, effort, and capital commitment;
- The share of ownership each will relinquish if, as, and when more capital comes in; and
- How ownership will be redistributed when a partner leaves the business.
Before you sign any agreement, run through a wide variety of scenarios in your mind. For example, consider what might happen if outside forces turn against you, your partner has a change of mind, the business becomes wildly successful, and so forth. Evaluate how well the agreement protects everyone’s interests under those circumstances.
2. Provide good employee guidance. Whether you hire your in-laws or total strangers, it’s important to get all employees to sign an employment agreement. This document should set forth straightforward expectations and rules for everyone to follow. The agreement should make plain that employees’ working status is “at will,” meaning they may quit or be terminated at any time, for any reason. It’s also helpful to set forth rules forbidding employees from any form of discrimination, harassment, and other illegal activities.
3. Put everything in writing. Every business must document its formal activities, including hiring, firing, receiving income, and making expenditures, and most internal organizational decisions. If you don’t create and maintain the proper documents — including those covering shareholder meetings, stock transfers, and a host of other formal events — you will run afoul of regulators and fail the due diligence efforts of future investors or buyers.
4. Stay out of court. The out-of-pocket cost of litigation, which also drains management attention, time, and energy, is far higher than most small businesses can afford. Include an arbitration clause in all your contracts, and consider every other alternative before actually going to court.
5. Protect your intellectual property. Today, almost every company has some intellectual property worth protecting. This usually requires:
- Confidentiality and “invention assignment” agreements with all partners and employees;
- Efforts to safeguard your trade secrets, such as locked doors and privacy from prying eyes;
- Trademark registration for company logos, product names, and so forth; and
- Copyright notices on all written materials.
For this and all important legal matters, it’s better to consult an attorney early on — even if you’re told there’s no reason for concern — than to let the issue slide, only to find out later you’ve stepped into a legal quagmire that may require years and big bucks to resolve.
6. Realize that legal ignorance is not bliss. Ignorance of the law is no defense against breaking it. In fact, it’s pretty much a guarantee that you will break some law or other, and get in trouble for doing so, too. Sure, there are lots of rules to follow. But that hasn’t stopped millions of other small-business owners from finding a route to success.
Just as you need to know some accounting, marketing, and sales techniques, you need at least passing familiarity with:
- Basic laws regarding contracts;
- Employment law;
- Intellectual property rights, including copyrights, patents, and trade secrets;
- Laws and regulations controlling how you may raise capital; and
- Local, regional, state, and federal regulations that apply to your business.
7. Never go naked into action. Doing business without a smart attorney on call is like turning your back on a roving gang of teenagers: Trouble is likely to ensue. In particular, the question of how to organize a business is complex, with far-reaching implications. In many states, for example, partners can be jointly held responsible for all of a general partnership’s debts. A different legal structure, such as an LLC or a limited partnership, can offer improved liability protection.
Whether you ask your attorney for help with organizational paperwork, stock-option plans, tax matters, intellectual property, or a customer who slips and falls on your premises, having an expert in your corner nips problems in the bud and helps you avoid missteps that will prove costly later on.