Opening and operating a new business is an exciting, occasionally terrifying process fraught with potential legal pitfalls. Thankfully, many of the most common legal problems facing new businesses can be mitigated with a little forethought and planning.
- Failing to Plan = Planning to Fail.
While a certain amount of “winging it” is an essential element of any business, consistently failing to anticipate and plan for reasonably foreseeable issues is a recipe for disaster. No matter the business you operate, there will be a number of fixed hurdles that must be cleared if you are to remain open and profitable for the long run. Proper pre-planning can encompass anything from making sure the business location is zoned and permitted appropriately to ensuring that you have sufficient funds to cover payroll and expenses while the business gets off the ground. Just as importantly, small business owners need to follow all the necessary steps to protect their intellectual property (IP). Failing to obtain a patent or copyright on your IP (or forgetting to have employees and partners sign a non-disclosure agreement covering the IP) can have disastrous consequences. Do not be cavalier about these things. Talk to an (IP) attorney if you have an idea or product worth protecting.
- Lack of proper structure.
One of the primary legal issues faced by new businesses is the need to select the correct entity structure. Choosing the proper legal structure for your business (i.e., a limited liability company, S corporation, etc.) can provide increased creditor protection and potential tax savings. Given the ever-present threat of litigation facing many businesses, there is no reason to turn down the added protection afforded the properly structured and incorporated business. If you have questions about what type of entity is appropriate for your business, do not hesitate to contact an attorney. Simply put, incorporating a business in Florida is a relatively inexpensive and fast process even after you factor in the cost of consulting an attorney (which I strongly recommend doing if there is more than one potential owner involved).
- When in doubt, write it out.
Failure to define the parameters and expectations of the relationships you have with business partners, vendors, service providers and customers lies at the heart of a myriad number of recurring problems.
At the outset, many business owners assume that operating a business will be and remain smooth sailing. Sadly, at some point — usually when money becomes tight — the decision-making process tends to break down. Once that occurs, it is crucial that all parties involved have a clear idea of who can make decisions and how those decisions can be made (e.g., simple majority or unanimous consent). Having a written operating agreement allows you to specify exactly how decisions are made and what will happen in the event that one of the owners becomes incapacitated, wants to sell out or passes away. Similarly, it is advisable to execute a Durable Power of Attorney designating a person or group of people to make legal and financial decisions for you if you become incapacitated. For example, if you became incompetent, do you have someone who could sign paychecks or pay the mortgage? Death and incapacity, while slightly morbid, are exactly the types of situations business owners should address before they become a problem.
Extending matters beyond your business partners, consider an employee who has intimate knowledge of your business, unprotected IP, or other products and customers. Without a written agreement (employment contract or non-disclosure/non-competition agreement), there is nothing preventing said employee from copying every aspect of your business and opening a competitor across the street. Alternatively, say you’ve hired a third-party to provide services (e.g., to design a website) but now find yourself locked in a dispute over what exactly your payments entitle you to. Has the other party breached the agreement if they are late in providing services? Who owns the website? Can you terminate the deal?
Remember, oral agreements are enforceable. They just aren’t as easy to enforce as written ones. If you are going to do business with someone else, remember that conditions such as the time for performance, price, and ownership and delivery of the product or website created should be spelled out in writing so as to better protect your rights in the event the relationship sours. For example, if you strike a deal over the phone, follow up by sending an email confirming the details of the verbal understanding. This simple step can save you untold headaches down the road.
Ultimately, if you reduce understandings to writing, accept and plan for the foreseeable hurdles and keep your wits about you, you should be able to avoid many of the more common legal issues facing business owners. Finally, when all else fails, don’t be afraid to call an attorney to help guide you through.