One of the last things on an entrepreneur's mind when they start a company is how to protect that company from future legal peril. More often than not, many new clients that come to my office have great ideas as to their products and it is those ideas that appropriately dominate their time and attention. What they often forget to do is to put in place the appropriate legal protections around that new business. Make sure that your new business follows the following steps to ensure an effective and successful liftoff and to avoid these common pitfalls:
1. Your business has no structure. Too many entrepreneurs just plain fail to establish the right structure for their enterprise. At some point, this failure can result in not getting credit or not getting investors on board. It can also leave the company-wide open to lawsuits against the business and the individuals and founders behind the business. Determine which legal formation is best for you-C corp, S corp, partnership or LLC. Be sure to research whether it is best to incorporate in your home state or in the State of Delaware.
2. No shareholder's agreement. Your company becomes successful and a larger company swoops in to make a bid to purchase what you have worked hard to create. The problem is that you do not have any shareholder's agreement to guide everyone's actions. Without such an agreement, chaos will most certainly take place. The fix is a simple one: Have an attorney draft a legal document that states how issues will be decided among shareholders and what will happen in the event a shareholder dies, leaves or even gets divorced.
3. Make sure your personal assets are protected. While your business is in the launch stage and even after incorporation the last thing that you need is for a creditor to attach or lien your personal assets. Make sure that you avail yourself of the protection provided for by a homestead petition. Also, if you own real estate with your spouse and your spouse has no part of the business, consider moving the real estate into the name of your spouse before any issues arise with prospective creditors.
4. No human resources guidelines. You are now up to 20 employees, for example, and now one of your employees is questioning a company policy. The problem is that you do not have an employee manual or handbook that sets forth any such policies and procedures. Not a good place to be in if you are the business/employer. Again, the solution is easy: Find an attorney to prepare a human resources policy that best fits your company. Keep in mind that all such policies are fluid in nature so the employment manual or guidebook that is created in your first year of operating your business will necessarily change by the second or third year as your company continues to grow.
5. Make sure your company has a reputation management program in place. As we all know, in today's wild and crazy internet, businesses are regularly disparaged by other vendors, competitors, and customers on a regular basis. If your company gets a negative social media review make sure that you have developed a system or program to handle those kinds of issues. Remember, how your company handles negative reviews is just as important, in some cases, as getting good reviews. Leaving negative reviews unchallenged and unresponded to is probably the biggest social media mistake a company can make next to not having any social media presence whatsoever. If your company is disparaged by a customer, you should take action immediately. At the Katz Law Group, we have handled commercial disparagement cases for many companies doing business in the Commonwealth of Massachusetts.
6. Failing to get patent, copyright and trademark protection. Many small businesses fail to take the necessary steps to ensure their intellectual property rights until it is too late. What to do: If your business is one that is product development-oriented then make sure you have a working relationship with an experienced intellectual property attorney to work with you as your company grows.
7. Do not waste lots of money on litigation. Better to try and negotiate disputes versus fight them out in court particularly as your business gets off the ground. Your company will have enough expenses to deal with at the outset and you might as well spend the money in a more constructive way for lawyers. You do not need to flush your hard-earned money down the toilet on unnecessary litigation expenses. To this end, make sure that any agreements that you have with customers or vendors have an arbitration provision which will mandate that if a dispute arises the dispute will be adjudicated in arbitration. Please take a look at our earlier blogs for more information on arbitration and mediation and the difference between the two methods of dispute resolution.
8. Secure your website data and website against an unwarranted attack. You need your business's website hacked as much as you need a lawsuit. The last thing your company needs is to lose customer data. Explore the use of website services like SiteLock to ensure your company's website and data safety and security.
9. Personal use of the internet at work. This issue ties in nicely with item four above regarding human resource guidelines. You have to have a set employment policy regarding internet use for your company, particularly where this is becoming a larger and larger problem for many companies. Your policies should outline and block inappropriate sites and require that all of your employees use their business computer for business purposes only. Also, have your employees sign a policy that allows your business to randomly monitor their activity.
10. Not remitting payroll taxes or sales taxes to government agencies. Believe it or not, this is a common problem. Not remitting monies to the Commonwealth of Massachusetts Department of Revenue or the IRS will get your small business shut down. Spend the money and hire a payroll service to remit employer and employee taxes automatically. By doing so, you will stay out of the crosshairs of the state and federal taxing authorities and, at the same time, avoid any claims by employees to the government regarding the operation of your business. You will also avoid the hefty fines and penalties that come with noncompliance.
At the Katz Law Group, we know what works and does not work for up and coming small businesses. Take advantage of our experience and knowledge by calling us at 508-480-8202.