You can’t start or run a business without facing some risks. One of the main reasons businesses choose to incorporate (or create some other form of business entity) is to limit their personal liability – so shareholders (owners) won’t have their own personal assets at risk for the corporation’s debts and liabilities. Having advised a diverse group business and industry clients over the past 20 years, there are a few things (often avoidable things) that get companies into trouble – sometimes big trouble. With businesses facing many more, “modern” risks today (as well as the old, more traditional ones), the saying “an ounce of prevention is worth a pound of cure” applies now more than ever.
Here’s my Top Ten for staying out of trouble:
1. Forming the business entity correctly. Choosing the right entity, making the necessary public “organizational filings” and attending to all of the other required regulatory and corporate governance documents is often one of most under-appreciated, misunderstood parts of starting and running a business. Businesses that don’t do it correctly can (and often are) faced with claims against their personal assets – only discovering when it’s too late that personal assets are now at risk. Not following the rules set out by state statutes where businesses are incorporated and doing business can result in what lawyers call “piercing the corporate veil” putting personal assets at great risk. These risks can be avoided if companies are set up correctly and follow the legal requirements needed to enjoy the protections afforded by them.
2. Get it in writing. Is there a binding contract or was it just an offer? Are the terms complete and accurate? Does the Uniform Commercial Code (UCC), statute of frauds or other special rules apply? If there isn’t a “sufficient legal writing” evidencing clear contract terms accepted by the parties, you might be leaving it up to a court of law to sort it out and then be stuck with the results. Good relationships, hand-shakes and emails are great ways to do business, but without the right documentation, it can quickly become a big disputed “he said – she said” situation where nobody really wins.
3. Using clear, concise language is a great way to avoid misunderstandings that lead to disputes or lawsuits. All too often busy professionals use contract templates and “boiler plate” language they’ve “borrowed” from some other transaction. These “templates” may (nor may not) have some good basic provisions, but if they aren’t carefully read or adequately modified to reflect the deal you’re doing; that can spell trouble. The best contracts contain a clear statement of the parties intentions, including who the parties are (yes, even this is sometimes incorrectly stated or overlooked), specifics outlining the transaction, the business terms, payment obligations, default provisions and legal rights and remedies of the parties. Having clear language is one of the best ways to avoid problems and get issues quickly resolved.
4. Know the rules. Every business is governed by some kind of federal, state, foreign or local regulation. Getting all the necessary approvals, licenses or permits before starting operations (and maintaining them) is critical. Organizations that don’t know or play by the rules are often faced with fines and enforcement actions by regulators, law enforcement, attorney generals and others; and along with fines, be subjected to license suspensions, business closures or other very public actions sometimes with crippling results.
5. Know the risks posed by technology. Protecting data is one of the biggest risks faced by businesses today. Not surprisingly, data theft and cyber security continue to be at the top of the list of concerns identified by businesses and consumers locally and globally. As the number of devices and ways of communicating grows so will the risk. No business or industry is immune from the need to protect its data. It’s not just big, heavily-regulated industries (like healthcare, financial, retail and IT sector clients) who have a growing number of federal, state, international and other industry specific regulations impacting their operations. The need to protect data security impacts the even the smallest Mom & Pop shops. For big business and small business alike, knowing and following the rules is crucial. Recent insurance industry data shows 60% of small businesses impacted by data breach out of business within a year of attack and cyber criminals have learned they’re often easy targets. The costs of responding to a data breach are significant and greatly outweighed by the modest time and resources needed to develop adequate data protection policies to help protect again this all too present problem.
6. Protecting hard-earned “proprietary” information from theft or misuse by others is critical. Every organization needs to identify and take steps to monitor and protect its trade secrets, inventions, business formulas and other proprietary information. Using properly drafted agreements (Non-Disclosure, Confidentiality and Non-Competes, etc.) along with appropriate proprietary filings (patents, trademarks, online registrations, etc.) can provide some good protection, but care must be taken to ensure they’ll be enforced if subjected to legal challenge.
7. Insufficient funding continues to be one of the big reasons new businesses fail. Without adequate financing, paying the landlord, suppliers and employees may be impossible leaving the door open to lawsuits, judgments a lot of other un-pleasantries. Starting out with sufficient capital along with good financial planning and accounting practices is one of the best ways to ensure the on-going success of a company and avoid lawsuits.
8. Having the right team of advisers at the outset and along the way (before any big problems surface) is one of the best investments you can make in the success of your business. A well-qualified business attorney – one with years of experience and proven successes – can do a lot more than just set up a company and draft a contact. The best business attorneys will come equipped with strong business acumen, broad legal capabilities and the deep, industry-specific knowledge needed to advice clients on wide variety of issues impacting their business and industry.
9. Adequate insurance coverage. With the growing number risks businesses face today, sufficient coverage to protect against the most likely, potential risks associated with a particular industry is critical. When choosing coverage, it’s important to have a clear understanding of what’s covered and what’s not to avoid unpleasant surprises. Too often policies aren’t read or understood until there’s a possible claim – sometimes resulting in too little, too late.
10. And my last bit of advice, “always follow your gut”. On more occasions than I’d care to re-count, prospective new business clients contacted me and began the conversation with “Something just didn’t seem right” and, of course, they proceeded anyway – now needing the services of legal counsel (sometimes at significant expense) to clean up the aftermath. I believe this rule is as important in life as it is in the law that is to say – trust your instincts. Because if it walks like a duck and talks like a duck – well, you know the rest of the saying…
As the year comes to a close, we wish you a wonderful holiday and new year!
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