How to Mitigate Your Legal Risks
by David Volk
Thomas Jefferson said, “The art of life is the art of avoiding pain; and he is the best pilot, who steers clearest of the rocks and shoals with which it is beset.” Are you steering a safe course in the operation of your business?
Owners, how hard was it to establish your business? And how hard are you working to keep it in business in these troubling times? Many, if not most, business owners are so focused on getting customers and doing business that they remain blissfully unaware that there are business risks that can be, at least to some degree, insured against by some relatively simple legal steps you can take before a problem arises. While it’s probably impossible to eliminate every business risk, you can reduce the chances of a catastrophic event with some advance planning.
Following are examples of types of agreements that provide insurance against risk:
Shareholder, Partnership, and LLC Member Agreements
If in business with others, you should agree upon how to deal with problems that can confront co-owners such as buying and selling ownership interests, management responsibilities, compensation, and death, disability, and retirement of members.
Credit Applications/Customer Agreements
Increase your chances of getting paid with clearly stated credit terms and customer policies. Your agreement should include an Attorney’s Fees Clause – so you can recover your costs of collection if enforcement action is needed – and a Personal Guarantee needs to be signed if the credit is extended to an entity.
Sale of Goods or Services Agreements
What exactly is being sold and under what conditions, whether warranties are included or excluded, the procedure, if any, for the return of defective goods and limitations on what the customer can sue for if things go wrong are a small sample of things to address.
Avoid going to court with an arbitration agreement that can rectify a dispute faster and more efficiently than a lawsuit.
Landlord or tenant, a carelessly prepared lease can be disastrous. While terms like price, duration, and responsibility for expenses such as taxes, insurance, and common areas obviously matter, more obscure issues – e.g. early termination, property destruction or property taken by eminent domain – pose great risks.
Independent Contractor Agreements
Trying to treat employees as independent contractors for tax and workers compensation reasons is a particularly dangerous area for a business. The IRS has twenty key factors they consider. A key is who controls how the work is done, so make sure they really qualify and that you document the factors establishing that.
Non-compete, Nondisclosure and Trade Secret Agreements
There is a natural conflict between wanting to develop and harness employee skills and the fear that an employee will learn the particulars of a business then go out and become a competitor or provide what they know about your business to a competitor. If you buy a business, you do not want the seller opening a similar business a few weeks later across the street. You may find it necessary to expose outsiders to confidential information.
A non-compete agreement is a restraint on trade – Florida law generally prohibits contracts in restraint of trade – but they are enforceable if properly prepared including setting reasonable limits on what can and cannot be restrained (e.g. relationships with specific existing customers; goodwill associated with a geographic location; and extraordinary or specialized training), restraint time period, and if appropriate circumstances exist.
Trade secret agreements are part of a strategy to establish that information such as formulas, patterns, compilations, programs, devices, methods, techniques, and processes are truly secret.
Developing an effective plan for transferring a family business to the next generation is far more complex than simply passing a family business on to your children in equal shares. Without a strategic succession plan in place many problems can arise, including dissension among siblings, change in company culture, failure to properly provide for the departing generation and most importantly, ultimate failure or loss of the family business that was built through decades of hard work and determination. Business structure and estate planning are key tools to ensure the assets of succession do not become the liabilities of succession.
Take time to reflect on what can go wrong in your business and then take preventive measures to remedy them. These agreements are fraught with peril if not properly written, so seek good help and be as cautious as you would be with any other major company decision.
David Volk, a Florida Bar Board Certified Business Litigation Attorney with Volk Law Offices, P.A., has 24 years’ experience and can be reached at email@example.com.