Your Biz Needs an Annual Legal Physical

By Nina Kaufman, Esq.

Don’t ignore these 5 legal issues, or you might find yourself facing expensive, protracted litigation.

It doesn’t take a genius to know that Grandma Sophie was right when she said, “An ounce of prevention is worth a pound of cure.” You can see it easily when dealing with employees. According to a survey by Mercer, “The Total Financial Impact of Employee Absence,” the total cost of absence can equal as much as 36 percent of payroll (compared with 15.4 percent for health-care coverage).

So why don’t entrepreneurs take the same approach toward their legal issues? Partly because small-business owners are already inundated with so many items to monitor–what’s cash flow like today? Is that new hire fitting in? Are we getting the expected ROI from our marketing efforts?–that they’re reluctant to add another thing to their plates. And partly it’s because small-business owners don’t quite know what to look for. Or they’re concerned that the cost of prevention could be prohibitive. One thing’s for sure, though: Certain legal issues can severely affect your top and bottom line.

Here’s a list of the five most common items that get overlooked when your company doesn’t go to the doctor (of jurisprudence) for its annual physical:

  1. Handling corporate “formalities.” Almost every state requires corporations and limited liability companies to prepare annual minutes–that is, a summary of the major decisions the business has made over the past year. When you don’t prepare them, it’s like dropping acid (the corrosive, not the narcotic) onto the protective armor that the limited liability structure is supposed to give  you. Too many drops weaken the shield, which could fall apart and leave you exposed to business creditors who may try to sue you personally . . . and succeed.
  2. Revisiting business partnership agreements. Like your last will and testament, a business partnership agreement isn’t meant to sit on the shelf once you’ve inked it. You need to make sure that whatever you decided still makes sense for you and your business–just as a will should be revised following major changes in your family situation and asset ownership. As long as the partners agree, you can change it at any time. Maybe you signed an agreement. (Maybe you didn’t.) Do the choices you made then reflect what’s fair now? Does the method of valuing the company make sense? Is the division of ownership fair if you’re taking a more active role than you did years ago? Has new intellectual property been added to the mix that the agreement doesn’t cover?
  3. Hiring part-time employees when you didn’t mean to. Sure, you meant to outsource to 1099 contractors. Yes, you may even have had a written agreement. But in the eyes of the IRS (and Department of Labor): If it looks, walks and quacks like a duck, it’s a duck. You may hire that college kid to handle your website and call him an independent contractor, but the more control you have over how, where and when he works, the more he’s likely to be considered an employee. And when you factor in the penalties, interest and personal liability for employment taxes, your goose is cooked.
  4. Training your clients to pay you. In challenging economic times, cash flow is king. What are you doing to keep the lifeblood of your business flowing? Are your payment terms clearly spelled out in your client contracts? Do you have a system for following up on outstanding invoices? Have you put the system into practice? If not, your top line suffers, which can lead to bottom-line disasters.
  5. Protecting your intellectual property. Your company’s intellectual property isn’t a frivolous luxury, like Yoko Ono Porsche Design Sunglasses. It’s your sine qua non, your je ne sais quoi, your USP, what sets you apart from the pack. Do you own it? Can you protect it? If you don’t take the right steps to safeguard it, you could find your competitive advantage in the marketplace siphoned off by others.

What’s the “cure” if any of these areas blows up in your face? Possible expensive, protracted litigation that could be 10 times or 20 times the cost of prevention. So make an appointment to see the doctor (of jurisprudence). It’ll protect your bottom line and help you sleep better at night.

Still overwhelmed by the thought of a legal checkup?  Get your copy of my business assessment checklist, “Is Your Business Legally Healthy?” It will help identify where your company may be legally vulnerable so that you can put the right preventive measures in place!

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