Austin Business Journal – by Sean Breen
There is nothing more gratifying for an entrepreneur than to grow a great idea into a solid business.
However, a mistake I see happen again and again is pouring all one’s energy, time and funding into the conception and follow-through of the idea, while overlooking the business’ proper legal setup and administrative organization.
Ignorance is bliss, until that lawsuit you never thought would happen arrives.
Consider this. Would you ever leave your place of business at the end of the day and not lock the doors? Protecting your business should be about much more than having a good security alarm.
It’s about ensuring that the business is prepared to handle restrictive covenants, noncompete agreements, trademark infringement claims and employment issues. Keep in mind that no industry is immune to litigation problems.
Beyond the standard legal documents a corporate lawyer would prepare for any startup, here are some constructive measures to keep your business protected:
1. Choose the business structure that fits your needs.
Many new business owners gravitate toward sole proprietorships because they are easy to set up, requiring little cost and effort. On the other hand, they offer no protection from lawsuits.
While a corporation separates your business from your personal finances, it can be costly and more complicated to arrange. A good alternative is the limited liability company, which is a combination of the two.
2. Prepare an employee manual with stated policies before you start hiring.
No matter how small your business, if you are going to hire employees, there is always a risk of legal problems.
Written policies help reduce that risk. Typical topics to cover in an employee manual include Internet and email privacy issues, nonsolicitation agreements, confidentiality agreements, severance agreements and noncompete agreements. Have each employee read the manual and sign it as proof that they agree to the policies.
3. Don’t let problems escalate.
Procrastination or avoidance are never good tactics when disputes arise with or among employees, customers or suppliers. The longer you let something stew, the more likely the party that feels cheated will take legal action.
4. Be open and honest with your creditors.
Communication is always a good thing. If you are short on cash and cannot pay a vendor, let them know. Making an attempt to work out an agreement with someone you owe is a good technique to avoid collection issues.
5. Maintain excellent bookkeeping and project records.
A paper trail is critical proof in a dispute. Thorough records include such important items as accounts receivables, cost codes and tracking systems, deposit slips, check records, purchase orders, customer orders, sales agreements, and even photos and video footage of project progression.
6. Keep track of the bottom line.
No business is immune to cash-flow problems. Keeping track of your bottom line will help you stay out of trouble with your creditors. Being vigilant about billing and collecting are important, as is making sure you have a diversified client base.
If the bulk of your business comes from one client and that client folds, you are left with a huge vacuum of expenses that might not be reimbursed.
7. Always support transactions with a business agreement or contract.
Many times, especially among friends, agreements are settled with a handshake. While this may seem totally appropriate in the moment, it is a recipe for disaster if relationships sour. A written and signed agreement should not be viewed as something required due to lack of trust; it should be regarded as an assurance of complete understanding among the involved parties. Many disputes between ex-friends go to court due to a poorly written agreement or a lack of an agreement.
8. Empower key employees to assist in identifying potential problems.
Build loyalty among key employees to help you identify any potential problems before they escalate. As the owner of the company, you may not be able to observe on a daily basis the dynamics among employees or between employees and customers. By empowering your supervisors and managers to understand that their input is critical, you motivate them to keep the company’s best interest as a top priority.
9. Pride and emotions can be detrimental.
While we all want justice to be served where justice is due, there is a fine balance between being motivated by emotions versus being motivated by what is logical and practical. When emotions are the driver, the consequences often end up being costly, time consuming and unreliable.
Maintaining a level attitude while sorting through courses of action to take to resolve a dispute is critical to a successful outcome.
10. Seek expert help when you are in over your head.
Litigation is complicated and costly. New laws recently have been passed in Texas that affect the way lawsuits are managed and executed. Even if the dispute has not reached litigation, the help of a specialized legal professional can save you time and money in the long run.
Mediation, arbitration and litigation are all techniques to solve disputes. Proactively investigate your options to learn what course of action seems most appropriate for your needs. Be proactive in seeking legal help. Don’t wait until the problem is on fire.