Small Business Owners and Entrepreneurs often ask me about legal problems facing most small businesses and for suggestions on how to avoid those problems.
Here are the 5 key mistakes I see being made and my suggestions on how to avoid them:
1. Failing to Maintain or File Proper Organizational Documents.
Individuals interested in forming small businesses do not necessarily spend the time researching the proper organizational structure of their new businesses and the implications of such decisions. You have a brilliant idea and are anxious to begin earning money. Do you read the necessary materials? Do you conduct research? Do you ask experts for advice and counsel? Are there pitfalls if you don’t? Possibly.
It’s not enough just to decide on the right ownership structure for your business. If you decide on a business structure that requires documentation (such as a corporation) you must follow all the requisite formalities and maintain all documents in good working order. You must also keep up with all filings.
My suggestion? If you are considering starting a small business or know someone who is, I can’t stress enough the importance of thoroughly researching all your options and talking to an expert or even two. Laws do change. Take the time and go through the process. Educate yourself. I did the very same thing when starting my own law firm as well as my organizational company, Paige of All Trades, L.L.C. Then, create a list of all required documents and filings and have everything in a clearly marked binder. Make sure to timely comply with all filings. Otherwise, you could be exposing yourself to personal risk because courts may “pierce the corporate veil” and find you personally liable if they believe that the corporation wasn’t properly established or maintained.
2. Failing To Check An Employee’s Non-Compete Agreement.
Many employment agreements contain non-compete provisions that prohibit employees from competing with their former employers for a period of time after the conclusion of employment.
My suggestion? If you are planning to start your own business, thoroughly review any employment agreement you may have signed with your former company to see if there are any restrictions. It is not a bad idea to have an attorney review it to see if you would be bound by any of these provisions. If you are working with others to start a business, review each other’s employment agreements to make sure everyone has full knowledge and understanding of the landscape. Or, once again, have an attorney review these agreements. If you fail to take the time to do these things, not only may you be restricted in the activities you can perform in your new venture, but you could risk your own credibility, have a former employer possibly damage your new business or worse, even haul you into court. It doesn’t hurt to be too careful.
3. Weak or Non-Existent Employment and/or Independent Contractor Agreements.
Many small business owners utterly fail to create, or have an attorney create, the requisite employment agreements for their employees. If you fail to have proper and executed documents on file, your employee (who may very well have had access to confidential or proprietary information while employed by you) could suddenly decide to leave his job and compete with you. Or, if your employee stays, there could be trouble down the road because your company policies were not clearly defined and understood. Verbal agreements can often be difficult to uphold in court. Why experience the hassle of added aggravation and possibly additional legal expense when trying to enforce your rights, absent such written agreements?
If you aren’t hiring employees but are working with independent contractors, the same advice holds true.
My suggestion? Protect your interests and rights with a properly worded employment agreement and/or independent contractor agreement, depending on the situation. Consider having an attorney help you draft these. Yes, there will be some legal expense involved up front. But the investment and the security will likely be worth it because in the long-term, you will be using these documents with every employee and independent contractor that comes through your door. And, know that your being proactive will likely save you money and time on the back end.
4. Litigation!
Litigation is expensive. VERY expensive. I know, that is not a shocking revelation to many of you. I spent six years as a litigation associate before striking out on my own. Legal fees can mount rather quickly and it is not uncommon for a company to pay MORE in legal fees than it would have cost to settle the dispute. It is highly unlikely that a small business owner, or any business owner for that matter, wants to spend precious time and money focused on litigation.
My suggestion? Seek legal advice before you make important decisions with respect to your business. You very well will end up saving more money in the long run.
5. Failing To Get Legal Advice When Appropriate.
Many small businesses and startups try to save on legal costs by simply avoiding hiring an attorney. Some try to get by on their own by cutting and pasting from legal documents found from websites. This may work out, but oftentimes, it can be a dangerous practice. You don’t know whether the sources are credible or whether the documents that you’ve cobbled together from a myriad of sources are appropriate and/or complete. You may inadvertently be using a different state’s laws. Or, you haven’t shared the entire picture with that attorney who you’ve spoken with for thirty minutes during a free consultation. If you make the wrong decisions or enter into legal agreements that don’t protect your interests, those actions might end up costing you MANY times more than what it would have cost you to talk to an attorney at the outset. In the long run, you likely may threaten your business interests if you fail to ask for legal advice when appropriate.
My suggestion? Retain an experienced attorney who understands the needs of small business owners. Experienced attorneys can save you time, aggravation and money by providing the right advice at the right time. Please don’t fall into the trap of trying to cut costs and compromise your business by failing to get legal advice when necessary.
Items in this article may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This article is general in nature and is not intended to provide specific legal or other advice.