How to avoid legal issues before they develop

August 07, 2018

avoid-legal-issues

The general perception is that it is expensive to work with an attorney. In an effort to save money, entrepreneurs try to handle legal matters and draft documents themselves. Often times, business owners wait until they are faced with a serious legal problem before hiring an attorney.

But legal services are a cost of doing business that may save your company money and help your business in the long run. Experienced counsel can help a small business spot and avoid legal issues before they develop into expensive problems.

Here are some examples of issues that could have been prevented by consulting a business attorney.

Set up your company with good organizational documents

Bob and Betty, a married couple, built a very successful business. Each is a 50% owner and both work in the business. However, they are now going through an acrimonious divorce. Unfortunately, the organizational documents for their limited liability company were poorly drafted. Among other things, the Company Agreement provides that all decisions must be made by the vote of the majority of the members. There are no buy-sell provisions. Neither Bob nor Betty is willing to agree to any business decisions, including distributions, filing tax returns, paying employees or issuing purchase orders. Needless to say, they have run this business into the ground and their employees have left for other jobs.

When starting a business, verify that the proper organizational documents are in place. Determine who owns the business and describe each person’s responsibilities. Adopt an agreement that covers items such as how the company will be managed, voting requirements, how profits will be distributed, restrictions on adding new owners and how the owners will solve disagreements.

Adopt a buy-sell agreement

A few years ago, Chris, Charles and Conner formed an LLC providing commercial painting services. In order to save money, the partners did not adopt a buy-sell agreement. The Company is barely breaking even. The partners have had a falling out. Conner wants to leave and is insisting the others buy him out for $75,000. All efforts by Chris and Charles to negotiate with Conner have failed. There is no basis for Conner’s proposed purchase price, but he has become so difficult to work with that Chris and Charles are considering paying him just to get him out of the business.

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, 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 will be structured.

Insist on written contracts

Debbie provides marketing services. She requires her clients sign a service agreement in which she specifies the services she is providing, lists the delivery dates for various benchmarks of the project and states her fee. One of her clients called her up on the afternoon before a holiday weekend, explaining they were in a big rush to meet a deadline and requested Debbie help them out. They needed significant additional work done outside the scope of what was covered in their contract with Debbie. Debbie dropped everything and worked through the holiday weekend in order to accommodate the client.

At the end of the month Debbie sent her invoice and the client refused to pay, stating Debbie was charging them for work they had not approved and furthermore, Debbie had missed a delivery date as specified in her contract. It turns out Debbie was waiting on the necessary feedback and approval from the client before she could make the delivery.

There are several ways these problems could have been resolved. For the missed delivery date, the simplest solution would have been including a provision in Debbie’s service agreement which made any delivery dates contingent upon receiving prompt feedback from the Client. As far as the change to the scope of the project, Debbie should have demanded the Client approve the changes and costs in writing before starting the new work. Even getting an email from the client confirming the new work would have helped.

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.

Use NDAs

Joe owns a landscaping business focusing on reducing water consumption by utilizing drought tolerant and native plants in customers’ landscapes. Alice, a software guru, suggested they develop an app to help homeowners with this process. She offered to split any proceeds they might earn 50/50. Joe readily agreed to the plan and over the next couple months Alice worked closely with him in his business learning how it worked. A few months later, Alice had the app up and running and it began making money. When Joe asked her to start paying him his share of the proceeds, Alice offered to give him 10% of the revenue she received. Joe was shocked! Unfortunately, he had shown her everything about his business without protecting himself first.

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.

Get legal advice

Wrong decisions or inadequate legal documents can cost you. In many cases, it can be significantly more expensive for an attorney to try to negotiate solutions to legal problems or to go back and fix poorly drafted documents than it would have been to have simply hired a business attorney to handle the matter from the outset.

Business legal issues are complex. Business owners should consult with their legal and tax advisers on such matters. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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