Business attorneys often encounter business owners who have made similar mistakes. These mistakes can ruin a business or at the very least be expensive to correct. The issues are common regardless of the industry or nature of the business. In a recent article appearing in the Denver Business Journal, David Bates highlights the following 18 legal mistakes business owners commonly make:
- Failing to incorporate and observe corporate formalities. Business owners expose themselves to personal liability by failing to form a corporate entity and failing to observe necessary corporate formalities.
- Failing to have an owner’s agreement. A written agreement should set forth the expectations of the owners and address potential evens such as divorce, death, or an inability of the partners to work together.
- Raising capital in violation of securities laws. Raising capital requires compliance with a myriad of state and federal securities laws and violations may expose business owners to personal liability.
- Promising ownership to employees without due care. Promising ownership to employees without written agreements outlining the relevant vesting terms can be a costly mistake.
- Underestimating the cost, time and unpredictability of litigation. Litigation is often only appropriate as a last resort and the time, expense, unpredictability, and emotional toll should not be underestimated.
- Failing to protect or respect intellectual property. Business owners should take steps to protect company assets such as trademarks, trade names, copyrights, patentable ideas, software, trade secrets and other intellectual property.
- Mistakenly relying on oral agreements. All important business arrangements, terms and conditions and agreements should be in writing. Disagreements stemming from oral agreements are difficult and costly to resolve.
- Not understanding contracts. Owners should consult with their attorney to discuss relevant contracts prior to entering into them. It is is critical to understand the terms and risks associated with any contract. It is also significantly less costly to have an agreement reviewed and negotiated up front rather than trying to unwind a transaction later.
- Using poor contract forms for critical agreements. Although transactions may be similar, agreements should be reviewed by the company’s attorney prior to execution. One of the most common and expensive problems concerns disputes arising from form contracts that were inappropriately used for a transaction.
- Not dealing with issues directly and in writing. When problems arise with another party, business owners should consult with their attorney and address those issues directly and in writing. Oral discussions will often be denied or interpreted differently in the context of a dispute. Those written responses can prove invaluable in resolving the dispute or in protecting the company should litigation result.
- Treating employee issues too casually. Mischaracterizing employees as independent contractors, maintaining an unprofessional atmosphere, failing to adhere to state or federal employment laws are very expensive mistakes. A disgruntled employee will not have trouble finding an attorney to pursue a claim against the company and such claims can include mandatory attorney’s fees for the employee and punitive damages against the employer.
- Not entering into agreement with employees. When appropriate, enter into non-competition, non-solicitation, and confidentiality agreements with key employees.
- Failing to pay taxes. Don’t do it as the company and its owners will be subject to the payment of fines, penalties and personal liability.
- Not appreciating that every company is a technology company. Today, every company is a technology company. Engaging in business over the Internet, licensing critical software, and storing data in the cloud trigger critical legal issues that are not readily apparent and require particular attention.
- Ignorance of the law. Ignorance of the law is not a defense for ignoring laws or not complying with applicable local, state and federal laws.
- Misunderstanding or lacking insurance coverage. All businesses should have some type of insurance coverage including coverage for certain types of litigation which is always expensive even if the company prevails.
- Hiring subpar professional advisors. Business owners should select competent attorneys and accountants. Hiring professionals who are operating outside of their area of expertise can be disastrous.
- Not planning for the exit. Operate the business to create value for the next owners and have a succession plan in place. Consult with professionals well in advance of any possible sale to ready the business for sale which will help to maximize the price.
If you would like to discuss legal issues facing your small business please contact our Business Law Group partner, David A. Closson at [email protected].