Ten Legal Mistakes Your Business May Be Making and How To Correct Them
By John P. Lowe, Jr. & Brett E. Dawson
1. Exposing Your Personal Wealth to Business Risks
You incorporated to limit your personal liability. But you may not be taking the necessary steps to assure that the corporate veil will protect you when it is needed. It is important to follow corporate by-laws, keep corporate record current and, most of all, keep corporate funds and personal money separate.
In New York, there is no corporate veil to protect you if you fail to pay wages. The 10 largest shareholders can be held personally liable for the corporation's payment of wages. You can also be liable to the government for failing to pay withholding and sales taxes. So, make it a priority to pay those items.
2. Exposing Your Business to Catastrophic Liabilities
All 50 states have adopted the Uniform Commercial Code (UCC) as a way to foster interstate commerce. The UCC allows buyers to recover a range of damages, including so called consequential damages, which can be enormous. Your insurance won't cover this risk, so make sure that invoices or purchase orders covering sales properly exclude these damages.
3. Failing to Protect Your Own Investment in the Business
If your business is a partnership or limited liability company (LLC), it is important to put the terms of the partnership or LLC on paper. It should specify the percentage of the business that each partner or principal owns, each person's level of participation in the business, how a person can exit the business and any other details necessary for each person to be perfectly clear on his/her stake and role in the business.
If you form a corporation, each shareholder needs to document ownership, so stock certificates should be issued. It is also important to document exit procedures through a buy sell agreement and to make provision for the death or disability of a key person. Insurance is the most common way to fund buy sell agreements and the loss of service from key people.
4. Allowing Others to Walk Away with Your Intellectual Property
Even though you paid for the development of software, literature or graphics, you may not own the "intellectual property" rights. If consultants or independent contractors performed the development work, they may own these valuable rights. Protect your business by getting a written assignment of rights before the work begins.
5. Letting Each Sale Become a Bottomless Exposure Pit
Under the UCC, your product may carry a number of express or implied warranties that a buyer can enforce years after the sale. The UCC allows you to provide a written limited warranty that spells out what is covered, what is not and for how long.
6.Allowing Foreign Competitors to Abuse Your Brands in Your Own Market
Foreign contract manufacturers in countries like China have long sold "excess" production of U.S. licensed merchandise in their own countries. But now this unauthorized production is beginning to show up on our shores. In addition to counterfeits, U.S. marketers of branded products are facing competition from authentic, unauthorized goods. You can protect yourself by filing your trademarks with U.S.Customs. For a modest fee, they will police the import market for you.
7. Jeopardizing Your Ability to Collect on Your Accounts Receivable
Pay close attention to your aging schedule and diligently pursue collections. If a receivable is getting too old, try to get a promissory note from the business with the owner's personalguarantee so you can be protected if the business files for bankruptcy. Also, watch the pages of Rochester Business Journal and other newspapers for liens and other legal action against customers. That signals credit trouble. Do not allow customers more time to pay; late payments can turn into "preferential payments" that a bankruptcy trustee can recover from you.
8. Building a Brand You Don't Own
Many believe that a "DBA" from the County Clerk or a corporate name from the New York Department of State gives them ownership of a name for all purposes. After years of struggling to build that brand you could find that someone else had superior rights to the name all along. When choosing a company name or product names, conduct a proper search to be sure the name isn't already in use. If your goal is to build a national brand, try to choose a brand name that can be registered as a federal trademark – not every name can be.
9. Failing to Take Common Sense Steps to Protect Company Assets
Trade secrets are among your company's greatest assets. While patents and copyrights are granted for a specific time period, trade secrets can be yours forever. But, you need to take reasonable steps to keep them secret. You need to physically secure them, make employees sign agreements not to divulge trade secrets and limit access only to those who need to know.
10. Allowing Employees to Take You to Court
If disgruntled employees take you to court, you will be airing your company’s laundry in public. Arbitration provides a more private alternative. Insert a clause in your employee agreements that any action will be resolved by arbitration, rather than in court.
We see business owners make these mistakes repeatedly, but you can avoid them by taking the preventive steps outlined in this article.