As we discussed in Part I, entrepreneurs and small business owners face a number of challenges as they strive to make their companies a success. These include everything from a tough economy, uncertain markets, rising cost of labor, changing political landscapes, new competition, and more. While certain factors are beyond a business owner’s influence, it is important to focus on those that can be avoided with proper planning and action. This article will look at two more of the Seven Deadly Legal Mistakes every entrepreneur must avoid.
Legal Mistake Number 3: Not getting the rules of the road established in your business
A handshake is great, and having your word be your bond is terrific, but when push comes to shove, you need to have something more concrete than an oral agreement. There are countless stories of business partners who destroy their companies and relationships over what one thought was meant when the business was created.
“I thought you said we split everything 50-50!”
“You never said that you’d hire your brother-in-law to manage our store!”
“We didn’t agree to take on that much debt!”
These misunderstandings can create a lot of tension in the business, not to mention litigation and unnecessary expense.
Too many business owners want to start their business cheap and fast. They say they will put off the legal paperwork until it becomes necessary, or they have more time, or they see if the business takes off. None of these are good reasons to delay. What are some documents you need to have in place if you have more than one founder?
If you have an LLC, an Operating Agreement
An operating agreement is a critical document used by limited liability companies (LLCs) that details the business's financial and functional decisions. An operating agreement is designed to govern the internal operations of the company in a manner that suits the specific needs of the business owners. When an operating agreement is signed by all the members of a limited liability company, it is an official contract binding them to its provisions.
Moreover, an operating agreement is required to protect the business's limited liability status. It is one of the three essential steps to forming an LLC in the State of New York. This is because an operating agreement provides the members with protection from personal. Without this, an LLC may be seen by the courts as a sole proprietorship or partnership—both of which subject the owners to personal liability.
If you have a corporation, By-Laws
If your entity is a corporation, by-laws are the governing rules that lay out the way in which the corporation operates. When a corporation is created, the first act of the board of directors is to create and approve the bylaws. This document dictates how decisions are made, who has authority to bind the company, what business the company will operate in, how meetings are called, held and actions taken, and more.
With multiple founders, a Founders’ Agreement or a Shareholders’ Agreement
When you have more than one original founder of a business, there may be agreements between the founders that you don’t want in the operating agreement or by-laws which all other owners of the business are privy to. Instead, a Founders’ Agreement (for LLCs) or a Shareholders’ Agreement (for corporations) acts to memorialize how the initial founders will work together. It may dictate how decisions are made, how votes are taken, how money is managed, and how equity vests in the business.
It’s never an exciting topic, but the legal paperwork is key for a business. Don’t make the Deadly Legal Mistake of neglecting it.
Legal Mistake Number 4: Not protecting your intellectual property from the beginning
New York entrepreneurs and small business owners should make a point of evaluating their core assets and determining the type of intellectual property (IP) protection that’s needed. Often the intellectual assets of a corporation, especially in the early stages, are far more valuable than any other asset.
When you start a business, you should begin utilizing non-disclosure agreements (NDAs) to protect your intellectual property. These documents will keep others from stealing your ideas and using them for their own advantage. Use them when you talk to potential partners, consultants, vendors, suppliers, investors, employees … everyone.
Once you begin operations, make sure you have an IP assignment agreement with all founders and employees. You never want to get into a situation where you are fighting over who owns what core asset. With founders and employees you also want to consider non-solicit and non-compete agreements to avoid unfair competition as you grow.
Finally, your firm should protect its brand with trademark registration and, as appropriate, patent filing.
It’s your intellectual property, don’t make the Deadly Legal Mistake and fail to protect it.
Even when business owners have orally agreed to certain terms, there is plenty of room for misunderstandings or miscommunications. Check back for Part 3! And click here for Part 1.
To learn more about protecting your IP as a business owner, see our articles on trademark protection, basics of IP, trade secret basics, and writing enforceable non-solicits and non-competes.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.