Running a successful business is difficult, detail-oriented work. Managing employees, servicing payroll, refining and expanding your brand, negotiating with suppliers and distributors, and dealing with everyday operational challenges and opportunities that arise—the list of responsibilities is seemingly endless. These tasks are complex and can be challenging for companies with established administrative apparatuses, let alone for small businesses where employees often wear multiple hats.
What is often lost on small business owners fighting to get their business off the ground is the importance of early sound legal planning to business success. Many areas of the law are implicated, including business organizations, corporate governance, labor and employment, intellectual property, privacy and data law, and securities regulation. This article by attorney Grant H. Frazier discusses some of the main stumbling blocks small business owners face:
1. Failure to Limit Personal Liability. Business ownership is accompanied by numerous risks, and entrepreneurs often struggle to determine the correct type of business entity to form to minimize tax and legal liabilities and maximize profitability. While each business structure has advantages and disadvantages, limitation of personal liability should always be a consideration at the forefront of owners’ minds. Limited liability companies are a great choice to accomplish this.
2. Failure to Establish Quality Corporate Governance. Effective and clear corporate governance mechanisms help set and communicate expectations, cultivate a company culture of integrity, increase team member accountability, and reduce intra-company disputes.
3. Failure to Develop and Use Clear Written Agreements. As a general rule, businesses should reduce all important agreements to writing. The crafting of precise legal agreements that protect a business’s rights and advances its interests is well worth the time and monetary investment. This is especially true where a business uses the same form agreement on a regular basis (i.e., independent contractor agreements, listing agreements for real estate agents, etc.).
4. Failing to Understand and Adhere to Applicable Labor and Employment Laws. Employers face a regulatory thicket of federal, state, and local laws that may apply in an employment setting. Which of these laws apply is complicated and based on factors such as employment type (i.e., independent contractor v. employee), size of business (i.e., fewer or more than 50 employees), and industry (i.e., construction, healthcare, etc.). Types of labor and employment regulations commonly applicable to businesses include: wage and hour, health and safety, anti-discrimination, and hiring and firing. The myriad of potentially applicable laws is ever-changing—both in terms of substance and applicability (i.e., what thresholds subject a business to certain regulatory frameworks). Business owners will also want to consider employing confidentiality, non-solicit, non-compete, and non-disparagement provisions depending on the nature of the business. At bottom, it is important to consistently reassess your employment practices to ensure compliance with the law and industry best practices.
5. Failure to Develop Clear Company Policies and Procedures. It is important for employers to carefully craft and implement written employment policies and training programs to ensure employees and contractors are well-informed regarding their roles and responsibilities. These documents set expectations of conduct, streamline internal processes, provide employees with a roadmap for day-to-day operations, and mitigate potential liability to the employer.
6. Failure to Protect Intellectual Property. Business owners often fail to adequately protect the intellectual property rights in a business’s name, logo, processes, services, and/or products. The more successful companies become, the more likely it is that this lack of protection will come back to haunt the business in terms of increased competition to secure rights in the business's intellectual property, increased chances of litigation, reduction in company valuation, etc.
7. Failure to Keep Adequate Business Records. Businesses need to maintain various types of records, including those relating to sales figures, tax, payroll, and insurance. Failure to properly maintain these records makes it difficult for businesses to secure financing and increases the likelihood of costly inefficiencies within the business, especially when it comes to addressing disputes or government inquiries. Substandard record-keeping can also significantly devalue a business at time of sale.
8. Failure to Maintain Proper Insurance. While businesses of every size should maintain adequate insurance to protect itself from operations-related liability (i.e., accident, natural disaster, data breach, etc.), this rule is especially true of small businesses. Businesses should review and analyze their insurance policies regularly to ensure the scope of coverage is appropriate with regards to ongoing and planned operations.
9. Failure to Obtain Necessary Business Licenses and Permits. Certain businesses require special permits, licenses, or insurance. It is important for businesses to know which requirements apply to them and the most cost-efficient way of complying with the same.
10. Failure to Plan for Succession of the Business. Many small business owners wear numerous hats and have a highly active role in the daily operations of their companies. Should an owner be precluded from effectively carrying out his/her responsibilities due to disability or similar circumstances, this can have a devastating impact on the business. It is imperative that owners plan for these short-term disruptions, as well as long-term succession if the owner decides to retire or dies unexpectedly. Failure to do so may lead to inefficiencies in management, inconsistent leadership messaging, in-fighting, dissolution of company value, and numerous other problems.
Small business owners are often tempted to handle many of the above matters themselves in an attempt to save money. The reality is that such decisions usually end up costing owners multiples of the initial cost savings in the long run. Lawyers can help owners identify and proactively address these legal issues.
Are you a small business owner or an entrepreneur about to set out on a new venture? Contact our Outside General Counsel team today to make sure you are equipped to successfully navigate the stumbling blocks identified above: Grant Frazier, Keith Galbut, Olivier Beabeau, Michaile Berg, and Justin Larson.