Small business owners are frequently overwhelmed when it comes to legal situations surrounding their business. These are some common legal mistakes that small business owners make in the early or evolving stages of their business which can often cost them more money in the long term.
Mistake Number 1: Not Choosing the Right Legal Structure for the Business
Rather than relying on information from friends, relatives, and anecdotal advice, consider choosing a trusted legal advisor to guide you through the pros and cons of choosing the right legal structure for your small business. LLCs are not the right fit for all entities. Not all small businesses qualify for S-Corp status. Sometimes a partnership or limited liability partnership may provide the best mechanism for your goals.
For more information on choosing the right ownership structure for your business, visit this guide online.
Mistake Number 2: Failing to Adequately Protect their Business Relationships
You may think that a “business relationship” means a customer or vendor, but it also includes employees and consultants that you bring in to help you move your business from idea to fruition. While you will only have a few “business relationships” when you start, these quickly snowball as you increase the resources you need to get the job done. Here are a few things to consider when it comes to protecting your business relationships:
Working with vendors will always be a critical part of many business operations. Whether or not you know and trust a particular vendor, you must always be careful when it comes to what is contained in the contract. Protecting yourself by addressing such issues as intellectual property ownership, what happens when things go wrong because of a strike or an act of God, who is responsible for obtaining any necessary governmental permits or licenses, and specific language that addresses issues such as the frequency of work, payment terms, warranties, dispute resolution, are but a few key areas to keep in mind. You always want to make sure both parties are aware of and understand, the exact specifications of the vendor arrangement in an effort to minimize any gotcha moments down the road.
Another contract with critical language usage is a non-compete agreement. Such Agreements are necessary to protect yourself and your new business after you spend the time, energy, and money to train employees. A properly drafted non-compete clause will restrict an employee from accepting a job with a competitor of your company, thereby minimizing any economic harm to you. However, because we do like competition, it is important to make sure that any such restriction on competition is carefully drafted so as to not run afoul of the law.
In addition to making sure that your time, energy and money don’t go out the door and into competition with you, it is very important that the moment you decide to hire an employee, you need to pull together an employee handbook that accurately represents your expectations and complies with both state and federal laws in an ever increasingly regulated workplace. A well-crafted Handbook will address such issues as an employee’s duties, the frequency of when wages are paid, what is expected of employees, leave policies, and any other benefits that may exist. Stating these things in a clear and concise language at the beginning of the relationship, and updating it as necessary, goes a long way towards minimizing any claims of unfair treatment or bias down the road.
Another key component for both employee agreements and those involving independent contractors is the inclusion of a Non-Solicitation Clause. This important addition to employee and contractor agreements protects your business from employees soliciting your current customers for their own benefit while employed with your business or shortly after they leave. These clauses are most common in service industries and for sales positions. Your customer list is worth protecting. In addition, your trade secrets, processes, and the special skills developed by your employees and contractors while on the job are worth protecting. While customers and employees may leave voluntarily, you’ll want to prevent your customers being put in awkward, pressured situations.
You can read more about these and other workplace agreements here.
The third generic group that you need to have sound agreements with are your customers. While this may seem like a no-brainer from a business perspective, who doesn’t want to be specific about what they will deliver to customers, and when, most times companies forget an all-important aspect of the customer relationship – protecting yourself from your customer hiring away your help so that they don’t need you anymore. You can protect yourself from this situation by including a well-crafted Non-Solicitation Clauses that addresses the ability of a customer to try and steal a key employee so that they can do the work in-house and no longer need your services. There is nothing worse than training someone to perform work for a customer, having decent revenue coming in the door through that work, only to lose it when the customer hires away that key employee.
Mistake Number 3: Writing Their Own Contracts
Using a template that you find online may seem like a cost effective alternative for a small business that’s just starting out, but those forms are often very generic, full of legal speak that few can interpret correctly, and may actually violate the laws of the state where you do business. Additionally, these templates can omit critical information required by state and local laws. Also, once these documents are signed by both parties, they become legally binding documents and will be enforced and interpreted by a court of law, even if the parties had a different intent than what the documents state.
Furthermore, a well-seasoned attorney can help you create novel approaches and original solutions to address your specific transaction needs, something that a template cannot accomplish.
Avoiding all mistakes in the curvy road of small business ownership is impossible, but partnering with the right attorney who understands the nuances of small business can make the journey less bumpy. For more information, contact us.