There are a number of legal issues that can trip up small businesses. Here are a few tips to make sure your company operates as smoothly as possible.
1. Form a Separate Entity
Determine the proper entity structure for your business. Your choice of entity influences how you borrow money, how you will be taxed and how you structure the sale of your business. Set up your business from the start in a separate entity so you protect your personal assets. Otherwise, you are personally responsible for the debts and obligations your business incurs.
Your company must have enough capital to pay the company’s foreseeable debts and expenses. Lenders realize that a newly formed business may not have the resources to repay a loan and frequently require the business owners to personally guarantee any loans. Many entrepreneurs fail to fully appreciate the impact of guaranteeing their company’s debts or personally guaranteeing other contractual obligations of the company, such as leases. Small business failures can cause financial hardship or bankruptcy for the individual owners.
2. Maintain Proper Records
Verify that the organizational documents are in place. Your business is required to create and maintain proper records including such items as adopting resolutions documenting business decisions, paying payroll and taxes, maintaining the company’s bookkeeping, complying with federal and state labor, safety and wage requirements, and acquiring and maintaining licenses or permits. Be sure to keep your business and personal finances separate.
You should have an agreement that covers items such as management, voting protocols, profit-sharing, restrictions on adding new owners and how the owners will solve disagreements. These items are typically included in an operating agreement, company agreement or stockholder agreement. Having a well-considered agreement can limit disputes and promote harmony among the owners.
3. Adopt a Buy-Sell Agreement
It is likely the ownership of your business will change over time. A buy-sell agreement provides for the orderly acquisition of an ownership interest in the event an owner leaves the business. Common trigger events include death, disability, termination of employment, divorce, retirement, bankruptcy or the owners no longer get along and want to split up. A buy-sell agreement addresses how the business will be valued when a trigger event occurs and describes how the payout to buy the departing owner’s interest will be structured.
4. Investors and Securities Laws
Many small businesses owners turn to outside investors to raise cash to operate their businesses. Frequently the owners and investors disagree on how the business should be run. Choose your investors carefully! Be sure to update your business’s governing documents to address the new ownership and management issues.
If people or companies are investing in your business, you must comply with the appropriate securities law disclosures. Otherwise, if the investors lose money, they can sue you for treble damages.
5. Insist on Written Contracts
Too often, entrepreneurs value speed over accuracy when it comes to detailing relationships with partners, vendors, customers and even employees. Verbal agreements are virtually impossible to enforce. Contracts must address each party’s obligations and explain how potential issues concerning your products or services will be resolved.
Be sure to document any modifications or extensions to your agreements in writing.
6. Require Employment and Independent Contractor Agreements
It is critical to hire good employees. But that is only the first step, businesses need to be aware that they must comply with various state and federal employment regulations.
Employee and independent contractor agreements are often vague or non-existent. Protect your business trade secrets, such as pricing, client lists, data, know-how, product specifications, business plans and marketing plans with agreements so employees and contractors cannot leave and start their own businesses competing against you.
A handbook is an essential tool for managing employment matters. It informs employees of the company’s policies and expectations. It can also provide the company with protection against potential employee lawsuits and other complaints.
7. Review Non-Compete Agreements
Non-compete agreements are enforceable in Texas if they are reasonable. Review all non-compete agreements your employees, independent contractors and you have signed and determine whether there are any restrictions that apply to your workers or you.
8. Protect Your Company’s Intellectual Property
Intellectual property includes any work that is the result of creativity, including inventions, discoveries, know-how, or processes. Require employees and independent contractors assign new technologies or processes they develop to your company. Properly register trademarks and license software to third parties.
Many times, the profitable verticals of a business evolve. Ownership of intellectual property in a relatively insignificant area may be critical for future success.
9. Use NDA’s
When exploring the possibility of working with other businesses or individuals, do not share your business’s confidential information, strategies, know-how trade secrets or proprietary information without first obtaining a non-disclosure agreement from the other party.
10. Take Steps to Avoid Litigation
Generally, litigation should be considered as a last resort. It is very expensive and distracting! In many cases, better solution is to negotiate disputed matters.
Litigation often results from poor planning, documentation and execution. Document all transactions with third parties and especially document any disputes. In many cases, litigation is the result of signing a bad contract or not fully understanding what you have signed.
11. Get Legal Advice!
Wrong decisions or inadequate legal documents can cost you! In an effort to save money, small business owners may try to draft documents themselves. Oftentimes, it is significantly more expensive for an attorney to go back and fix these documents than to simply have the attorney handle the matter from the outset.
Experienced counsel can help a small business spot and avoid legal issues before they become destructive to the company. Seek legal advice before making important business decisions.