Some Common Mistakes When Starting a New Business

When starting a new business for the first or consecutive time, there are many common mistakes made by business owners and founders that can create serious financial and legal issues.  At times, startup companies and entrepreneurs focus on getting up and running, obtaining investment seed funds, and marketing the business.  This can be an enormous task that consumes a substantial amount of time, money, and other resources for business owners. It is then easy to neglect some of the important business law planning that can keep a business profitable and out of a Courtroom.  

What are some of the common legal mistakes made by new, startup companies? 

Risk Management - How does your organization intend on managing risk and minimizing liability?  What type of measures have you taken to ensure that you are not exposed to a potential lawsuit that can cause substantial overheard in legal fees, or threaten the viability of your business if you have to pay a monetary judgment to a claimant? Unfortunately, business owners do not focus on risk management from the outset of business operations. This is an area that can be addressed by a business lawyer who can help you set up a limited liability entity, draft legally binding agreements that limit your liability, as well as determine whether you need commercial insurance.  

Partnership / Shareholder Agreements - The days of handshakes and verbal agreements are over.  In this business world, which invariably involves a considerable amount of Plaintiffs' attorneys willing to take on new litigation cases, it is exceptionally important to write down the deal you made with your business partners. You can ask the thousands of business partners in Massachusetts who have ended up in State court litigation whether they believe they should have created a more unambiguous and comprehensive partnership agreement, and the answer will most likely be "yes." Partnership and Shareholder Agreements will help settle issues concerning management, buyouts, distributions, voting rights, death/ disability, and other substantial issues well before they arise.  The agreement provisions on these issues should be customized to your needs and adjusted according to the various case law decisions made by Judges throughout Massachusetts. It is crucial that a business attorney ensure that the provisions of these agreements are reasonable, compliant with existing laws, and that they leave very little room for ambiguity or different interpretations.  In this case, boilerplate forms, and "simple" agreements will not be enough to stave off any issues that arise during the life cycle of a partnership.  

Compliance with State and Federal Laws - How does your business intend to make sure that it is compliant with all of the important laws and regulations that may affect your business? Wage and Horus Laws, Overtime Laws, Sick Leave, Maternity Leave, Independent Contractor Classifications, Worker's Compensation, Unemployment Insurance, Discrimination, ERISA, and the regulations that specifically apply to your industry and type of profession/service/product. What types of licenses are required for your business, and what type of oversight and regulations does that license subject your business? Sometimes business owners think it is a good idea to research the pertinent laws on the Web, and adjust their business operations accordingly. This is not a good practice since self-help will not allow you to obtain the benefit of an independent expert to help you identify all of the different ways that you can run afoul of applicable laws and regulations. Also, many small business also make the mistake in assuming that many of the laws listed above do not apply to it because it is a "small business." This is faulty logic since many laws in Massachusetts, particularly employment laws, apply to any and all businesses, no matter the size. 

Internal Agreements, Notices & Manuals -  The above has touched on some of the external pressures and issues that may affect a business, however, a business can also be threatened internally by its employees.  Although human capital may be the cornerstone of any business, that capital needs to be managed and administered properly so as to avoid any potential legal issues when "something goes wrong."  This process all begins with creating appropriate employee applications, job announcements and an employee handbook. Are you procedures for hiring and managing employees fair, reasonable and compliant with the applicable laws and regulations? Or do you just plan to "wing it" when dealing with employee termination procedures, sick and over time, unexcused absences, confidentiality of your business data, phone and internet use, expense reports, and the many other areas that can cause headaches for employers. 

Second, it is important to consider asking each employee to sign a comprehensive employment agreement.  In this instance, we are not recommending that you provide an employee a right to employment (which is a common misconception with the term "employment agreement"), however, we do recommend that you place certain duties and obligations on your employee that govern your relationship during their term of services, and post-separation.  Confidentiality, non-competition, and non-solicitation provisions are an important step to ensure that former employees do not: transfer or retain your proprietary business data and information; set up a competing enterprise or work for a direct competitor of your business; or take part in the direct or indirect solicitation of your customers or key employees after the departure of that employee.  Unfortunately, many new businesses overlook these important agreements and they cannot undo any of the damage that a former employee has caused to the business.  

In addition to the four areas described above that can create issues for a new (or any) business, there are several other areas that require attention.  Intellectual property, including trade mark, maintaining a trademark, copyright, work for hire agreements, and the like area also areas of substantial concern for a business.  Well drafted contracts that become "standard" in any transaction can be an essential tool for limiting exposure to lawsuits and streamline any disputes. Future articles will address these important areas of business law at www.northshorebusinesslaw.com/blog 

I hope that you have found this article helpful. Whether you are new or existing business owner, Attorney Stefan Cencarik of the Law Office of Stefan Cencarik, PLLC, of Lynnfield, Massachusetts, a business, intellectual property, and dispute resolution attorney, can provide the expertise and legal support you need.  Our office can be reached at 617-669-9780 or consultation@northshorebusinesslaw.com.