Owners and managers of small businesses frequently fail to adequately address legal issues. This failure may stem from being busy with other matters, unaware of or insensitive to legal concerns, or reluctant to spend the money to hire an attorney. Unfortunately, such businesses may end up incurring substantial expenses or liabilities that could have been avoided with good legal planning.
Following are ten key legal mistakes frequently made by small businesses:
1. Failure to Prepare Corporate Minutes.
To preserve the shield protecting shareholders from personal liability for corporate debts, a corporation must observe formalities such as preparing regular minutes of the Board of Directors and the shareholders. The lack of minutes also can jeopardize the validity of various corporate tax deductions, particularly in the areas of officer compensation and benefits.
2. Failure to Update Purchase Order and Invoice Forms.
The lack of proper legal provisions in these forms could place the company in a weak legal position in the event of a payment or other dispute with a customer.
3. Lack of Nondisclosure Agreements with Employees and Contractors.
Much of the value of many start-ups resides in their intellectual property. Solid nondisclosure agreements are essential to protect that property.
4. Lack of Current Buy-Sell Agreement.
Almost any business with more than one owner should have a buy-sell agreement. A buy-sell agreement defines what happens upon the death, retirement, or termination of employment of one of the owners, or when an owner desires to sell his or her interest in the business. The absence of a buy-sell agreement can result in unintended consequences or a legal quagmire in such circumstances.
5. Lack of Up-to Date Employee Manual.
An employee manual sets forth workplace rules and policies and procedures relating to the employment relationship. The lack of a satisfactory manual increases the risk of misunderstandings or legal violations, which can result in expensive employee disputes, lawsuits, and governmental penalties. In addition, a manual needs to be updated frequently to deal with changes in the law.
6. Failure to Document Transactions Between Corporation and Owners.
Shareholders often enter into transactions with their corporations, such as leases of real or personal property or loans to or from the corporation. The failure to satisfactorily document these transactions (as with the neglect to prepare regular minutes) can weaken the corporate liability shield or lead to adverse tax consequences.
7. Failure to Update Corporate Articles and Bylaws.
Articles and bylaws need to be reviewed and modified from time to time to take account of legal changes. Otherwise, the corporation could find itself in violation of corporate laws or subject to cumbersome and outmoded corporate procedures.
8. Lack of Stock Option or Other Equity Plans.
The absence of well-designed equity incentive plans can make it harder for a business to attract, motivate, and retain employees. A poorly drafted plan also could result in unexpected liability or expense for the corporation.
9. Inadequate Estate Planning.
With a closely held business, estate planning by the owners must be done in conjunction with overall business planning. The lack of suitable estate planning documents can result in costly probate proceedings or unnecessary estate taxes.
10. Failure to Conduct Legal Review of Website.