Part 1: Protecting Yourself
By Chris Parvin
Recently, I had the opportunity to speak in front of business owners at a conference in North Texas. As I prepared, I began to think about the different business law cases I’ve handled and some of the most common mistakes I’ve seen from business owners during my career. Many, many times, I’ve seen unnecessary litigation or problems because a business owner either didn’t plan for the future or didn’t consider all their options as they made those plans.
Below are the Top 10 business law mistakes I see on a routine basis and my suggestions on how to avoid them. Part 1 of this two-part article will focus on how to protect yourself as an owner; Part 2 will focus on protecting your business. I hope by the end of this series you’ll have a better idea of how you can protect your business for years to come.
- Failing to Correctly Set Up Your Business Structure
Almost every business needs some type of legal entity. Whether you choose to incorporate (C Corp or S Corp), create a Limited Liability Corporation (LLC), or even a partnership, any limited liability entity is a better choice than simply operating as a sole proprietorship. Whichever you choose, you need to consider the potential tax benefits and liability protection.
Take Bob, for example. Bob starts a company out of his garage making small hard candies. Because he’s so small and just starting up, he doesn’t take the time to set up his legal entity. One day, someone with a severe food allergy eats one of Bob’s candies and dies. Because Bob failed to put an ingredient list on the packaging, he’ll likely be held legally liable. Now, he’ll risk losing his personal assets if there’s a judgment against him.
Bottom line: Get a limited liability entity for your business, regardless of your business size. Talk to a lawyer so you pick the right one.
- Mixing Your Personal Assets with Business Assets
Ever heard the phrase, “It’s not personal, it’s business”? That’s not just about how we treat people; it also goes for your assets – bank accounts, credit cards, vehicles, etc. Another big mistake you can make as a business owner is thinking all assets are the same: yours to do with what you want. When your company owns assets, you must keep them separated from your personal assets. You can’t merely use your company credit card or checking account to pay your personal bills. If you choose to mix your personal assets with company assets (called “commingling”) or if you use your company funds for personal expenses, you risk a court disregarding your limited liability status.
One time, an attorney hired me to sue someone over a bad floor a contractor put in the attorney’s house. The attorney then paid me with a corporate check. See an issue there? To maintain the limited liability wall between your business and you:
- Don’t mix personal assets and business assets.
- Don’t use the business checking account as “yours” and vice versa.
Bottom line: Keep separate books, separate assets, and generally respect the fact that you and the business are two separate legal persons.
- Ignoring the Need for Key Agreements
In addition to being a board-certified, practicing attorney, I’m an adjunct faculty member at Texas A&M University School of Law in Fort Worth. Each term, I tell my students they have to protect themselves against people on their own team just as much as opposing parties. This goes for partners, employees, and even vendors. It may sound harsh, but it’s a fact of life. Most business relationships should be clearly defined in writing.
Over the years, I’ve had clients hire me to sue wayward employees for stealing confidential information or for trying to lure away other key employees, vendors, or clients. I’ve had cases where a client sued a business partner for misappropriation of funds or for trying to freeze my client out of their own company. I’ve even had a client sue a spouse’s business partners because that spouse had passed away and control over the business wasn’t clear.
In most cases, an absence of contracts caused confusion, misunderstanding, and bitterness, and put personal and business futures at risk. The key to protecting your interest and thus your family’s welfare is to have solid contractual agreements. For partners, that means agreements specifying what part of the business each partner controls, what happens if one of them dies or becomes incapacitated, and what is the business worth and when if a partner decides to get out of the business altogether. For key employees, you need an agreement that spells out non-compete expectations or non-solicitation of other employees and/or vendors. And for vendors, you’ll want a contract that specifies the terms of your relationship.
Bottom line: Put everything important to your business in writing so you and others have a clear understanding of what’s expected.
- Drafting Contracts on Your Own (Or Going Without)
People hate paying lawyers for doing paperwork. I get it. But don’t think of your business attorney as a glorified assistant, typing contracts and making copies. He or she is committed to drafting the right contract for you and you are paying for their knowledge, expertise, and ability to distinguish between a “bad” contract and a “good” contract.
A “good” contract includes clear, concise language; provisions that clearly provide what each party’s obligations and benefits are; and provisions that are specific — especially those that involve timeframes and amounts of money to be paid. These contracts will also include provisions that you may not care about until you have a problem, things like what state’s laws are to be used to interpret the contract; where any lawsuit is to be brought; and whether you can utilize Alternative Dispute Resolution methods like mediation to resolve the problem. There’s little guarantee the simple contract you slap together or “have used for years” will hold up should litigation arise.
Bottom line: You know you need a contract, so hire a business lawyer and make sure it’s a “good” contract.
So, there are the first four of my Top 10 business law mistakes, focusing mostly on how to protect yourself. I’ll be back with Part 2, where we’ll look at how you can protect your business. In the meantime, if you’ve got questions or need to explore adding a business lawyer to your team, give me a call at (214) 974-8940.
Attorney Chris Parvin, the managing partner of Parvin Law Group, is board certified in estate planning and probate law by the Texas Board of Legal Specialization. His firm specializes in estate planning, probate, business law and family law. Learn more at www.parvinlaw.com.