Subscribe: Top Ten Legal Mistakes Small Business Owners Make and How to Avoid Them
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TOP TEN LEGAL MISTAKES SMALL BUSINESS OWNERS MAKE AND HOW TO AVOID THEM
Our experience, as well as those of our clients, has left us sensitive to the numerous legal mistakes small business owners make. We offer this in an effort to help you avoid them.
Pre-Formation
1. Starting a business while employed by a potential competitor, or hiring employees without first checking their agreement with the current employer and their knowledge of trade secrets.
The law is clear that if someone is currently working for a company, particularly if he or she is a key employee, they cannot operate a competing business. Even just incorporating may spark a lawsuit from the current employer. Would-be entrepreneurs should first go to their current employer and either resign, or tell them what they\’re doing and ask them if they\’d be interested in investing. Amazingly, that is often a very smooth way of ending that relationship. Under no circumstances should they misrepresent the nature of the new business.
Even after leaving the current employer, one cannot use or disclose the company\’s trade secrets. Under the so-called Inevitable Disclosure Doctrine, if someone has been exposed to trade secrets at their job and leaves to work for someone else, and if their responsibilities in their new job are sufficiently similar, some courts will conclude that it is inevitable that they will use the information they had from the earlier position. They could face an injunction prohibiting them from working for the new employer until a number of months go by and whatever trade secrets they had are stale.
It also helps to know whether potential recruits are subject to covenants-not-to-compete. States vary in terms of how enforceable they are, but one shouldn\’t assume they are not. One should also check to see what assignment of inventions might have been signed. Personnel files should be reviewed and recruits should check theirs, to be certain that a covenant-not-to-compete or an assignment of inventions wasn\’t tucked into a signed non-disclosure agreement.
2. Mistakes When Leasing Office Space
Next to payroll expenses, facilities and related expenses are generally the second highest expenditure for a company. Some of the most commons mistakes that companies make when leasing space are:
Formation
3. Choosing the Wrong Ownership Structure: Choosing an ownership structure is one of the most important decisions you\’ll make for your new business. You must consider your specific needs. The following factors can help in making your decision:
4. Consider your potential liability: There is a summary of the amount of liability you may face depending on how you structure your business.
Sole proprietors – Because sole proprietors are personally liable for all business debts, you could potentially lose everything you own if your business debts are not paid.
For most people, starting a one person business, operating as a sole proprietor at the outset makes sense. But, if your business is especially likely to be sued, is funded by outside investors, or might be profitable right from the start, consider forming an LLC instead. For most people starting a business with more than one owner, an LLC is preferable to a partnership as you get limited liability but need to do less record keeping than a corporation, and the same taxation as a partnership.
Post Formation
5. Mistakes After Incorporating and/or Creating an LLC: A company that does not follow proper formalities may inadvertently create personal liability for its shareholders or members. In addition, a company that fails to maintain proper records may lose credibility with potential investors performing due diligence.
Some of the mistakes small businesses often encounter include:
The On-going Concern
6. Failing to Clearly Document Partners Rights and Responsibilities
This mistake is usually made at formation by not having a properly crafted Operative Agreement. The consequences of that early mistake are revealed as the business begins to operate. Founding shareholders or partners (or members of an LLC) should have an agreement that answers at least the following questions:
7. Unclear Expectations and Rules for Employees
It is important to set clear expectations and rules for your employees. Make sure they acknowledge that they are At-will employees, which means they can quit or be terminated at any time without exposing your business to liability. It is also important to inform your employees that discrimination, sexual harassment and other illegal acts will not be tolerated.
Human Resource Manuals, also known as employee handbooks, do not have to be in writing, however, a policy manual is the clearest way of spelling out what is and is not acceptable. A manual is not the only legal way to make policies known. It can be shared verbally, employees are fired every day for violating a spoken policy. In fact, the firing is more proof of the policy.
Notwithstanding this, many companies mishandle employee issues. Companies that are not careful when documenting relationships with employees and independent contractors, accidentally may change their status – from an At-will employee to an employee with special rights upon termination, or from an independent contractor to an employee for whom the company must provide benefits and withhold taxes. In addition, employee obligations such as non-competition, non-solicitation, confidentiality and intellectual property obligations should be properly negotiated at the time of hiring to ensure enforceability.
8. Ignorance of the Law
Just because laws are numerous and complex doesn\’t mean your business can ignore them. Learning little about the following basic areas of law can keep you out of legal hot water:
9. Getting Involved in Litigation
Litigation fees can be astronomical, and they can quickly drain management time and resources. Consider alternative means of dispute resolution, such as mediation or arbitration. Or, if a reasonable settlement offer is available, think seriously about taking it instead of spending more time in litigation.
10. Failing to Hire the Right Professionals
A company that hires knowledgeable legal, accounting and tax advisors who are used to working with early stage companies can avoid many of the common mistakes. A company should hire and consult with those advisors in the early stages of its formation. Compliance with applicable laws can be relatively inexpensive if experienced professionals are brought on board at the right time. The cost to fix those mistakes however, is not.
At the Law Office of Barron & Posternock, LLP, our experienced lawyers are committed to providing each client with the personalized attention and counsel that is necessary to achieve a favorable legal result. Our skilled law attorneys are leaders in the Southern New Jersey and Philadelphia legal communities, and they stand ready to assist you with your commercial, employment, real estate, and other legal needs.
http://www.barpostlaw.com.
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