Part 2: Protecting Your Business
By Chris Parvin
In my last article, we looked at common mistakes business owners make in failing to protect themselves. Many people make these errors early on, failing to recognize how they need to (legally) separate themselves from the work they do. In this second half of the series, we’ll address what you should do to best protect your business and its assets.
5. Failing to Protect Key Intellectual Property/Trade Secrets
Intellectual property, or IP, is the “magic sauce” that gives your company a competitive edge. It is the thing that makes you unique. Remember the old McDonald’s jingle, “Two all-beef patties, special sauce, lettuce, cheese…”? Those ingredients together (i.e., the recipe) are IP, the name is IP, the jingle is IP, and that “special sauce” is IP. (And now you’re craving a Big Mac, right?) Your trade secrets are all those people or vendors who sell you the ingredients you need and the pricing strategy that goes into selling your product or service. No matter whether you’re protecting a recipe, a jingle, pricing strategies, or the list of vendors who sell you the ingredients, it’s critically imperative that you protect your IP and trade secrets. These are the items that give your business a competitive edge.
But how do you do that? There are number of ways. First, for anyone who sees, touches, uses, or has access to your IP and trade secrets, consider a Non-Disclosure Agreement or another type of contract that limits their rights to use or give that information away or use it in any manner except to benefit your business. Next, mark all documents that details that insider information as “Trade Secret” or “Intellectual Property” so it’s clear it’s official. Finally, keep those secrets locked in a safe or a safety deposit box and out of reach of just anyone. Only provide them to someone when necessary and when they’re adequately protected.
Bottom line: You need to protect your insider information from anyone who might want to take it away.
- Failing to Budget for Business Legal Expenses
When you’re starting your business, you’ll stop and consider all the costs associated with making your company successful: startup funds, inventory, location, payroll, and advertising. But what about legal expenses? No one likes to think about being sued somewhere down the line, but it’s a cost of doing business. It should be a budgeted item whether you’re just beginning or you’ve been in business for a decade.
How much you need to budget depends on the size of your company, how much capital you need to raise, and what agreements you need with employees, partners, vendors, etc. My advice? Call three business lawyers in your area, explain your needs, and a get a free estimate. If each say they need between $5,000 and $10,000, you’ve got a good idea of what that expense will look like and can factor that into your budget.
Bottom line: Legal expenses are a continuing cost of doing business and it is imperative to have a lawyer involved with your company.
- Inaccurate or Inadequate Record Keeping
Turns out, inaccurate or inadequate record keeping is a big problem for most businesses. Outside the normal day-to-day or annual reporting, clean, accurate records are necessary anytime you have to deal with the Internal Revenue Service or a litigation issue.
Let’s start with the IRS. They advise keeping records to sales, deductions, credits, and losses for up to seven years. They can go back during that period of time and re-open a tax return or retroactively audit your business. You’ll need documentation to justify any claims or tax breaks. I recommend using software like Quickbooks or employing a CPA to make sure those records are sound.
When it comes to litigation, the first thing lawyers do is initiate a phase called “discovery,” wherein all books, records, internal memos, emails, letters, etc. are requested. How does it look if something routine – like a monthly sales report – isn’t available? Lawyers can cast doubt on your business and accuse you of hiding something. The best course of action is to keep solid records and let your lawyers spar over whether or not to release certain information during discovery.
Bottom line: Do you part and keep clean, accurate records on your business and its activity.
8 & 9. No Estate or Disability Plan in Place
So, here’s a pitch for another aspect of my law practice: estate plans, disability plans, and guardianship. Time and time again I meet people who have no definitive plan for when tragedy strikes. I realize we get uncomfortable talking about death and disability, but it’s a fact of life we shouldn’t ignore.
Consider this scenario: You and three other partners build up a business worth $5 million. Things are going great until the worst happens: one of your partners is killed in a motorcycle accident. He handled all the business finances and now questions arise:
- He owned 25 percent of the company stock, so who can vote his shares? His wife?
- Do you still need to pay his six-figure salary to his wife?
- If his wife wants to be bought out, how do you do that and for how much and how long?
- What if his wife shows up, claims ownership, and assumes his role at the company?
The waters can get even murkier if that same partner wasn’t killed but suffered a traumatic brain injury during the accident. Now you have to consider who is his guardian, how much control do they have over your business, and what obligations do you have to him. Clear estate plans or guardianship plans will spell out what to do in these worst-case scenarios.
Bottom line: It’s not enough to have an estate plan for yourself and your spouse; you need a plan for your business as well.
- Not Having a Lawyer or Using the Wrong Lawyer
At this point, I hope you see how important having a lawyer on your side is to the health and success of your business. At every stage of your company’s birth and growth, you can use an attorney to make sure you’re going down the right road and protecting yourself and your business. In this day and age, this isn’t a nicety – it’s a necessity.
Whoever you choose, make sure they are board-certified and in good standing with your state’s bar association. Ask questions about their experience with businesses your size or other companies in your industry. Ask for a free consultation to discuss your needs, how they can help, how they handle billing, etc. Research and interview lawyers the way you do the people who work for you and with you. After all, you’re bringing them on to your team; they work for you.
Bottom line: Add a proven, vetted business lawyer to your team.
So, there you go: My Top 10 Business Law Mistakes. (Or, as I thought about calling this series, “Where I’ve Seen My Clients Go Wrong Over the Years.”) It’s imperative you know how to protect yourself as well as the business you’ve worked so hard to create. As always, I’m available to answer any questions you might have regarding any of the topics I’ve touched on. Give me a call at (214) 974-8940.
Attorney Chris Parvin, 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.