Owning your own business is a dream held by many, and advances in technology have eliminated many of the barriers that once stood in the way. Still, even with the advantages offered by low costs and funding availability, entrepreneurship is not easy and about half of new startups fail within five years. In addition to the all-too-common mistakes of overestimating market interest and underestimating the competition, many business owners make legal mistakes that can be costly. To give yourself the greatest advantage and avoid costly litigation in the future, take care to avoid these three common legal mistakes that business owners make.
- Not having a detailed partnership agreement that permits an orderly exit plan if there is a shareholder dispute.
When a partner leaves a business for retirement, disability, or as a result of their death, disputes about the value of their contributions can arise if the issue has not previously been defined and addressed in the professional partnership agreement. Not only should the agreement define the types of exits that qualify for compensation, but also need to quantify value and indicate how their payment should be characterized under the Internal Revenue Code. Specifics need to include recognition of goodwill, distribution of the partner’s capital account balance, their share of undistributed profits and collectible accounts receivable.
- Not protecting their intellectual property.
Not only do companies fail to protect their intellectual property, in many cases they do not fully understand what qualifies as intellectual property and needs to be protected, or assume that taking precautions will be too costly to be worthwhile. Intellectual property needs to be explicitly identified, registered, and monitored, and any trademark or copyright violations need to be aggressively and professionally pursued.
- Failing to consult legal counsel for an annual legal audit to avoid legal disasters
Far too often, business owners operate on the assumption that once their legal framework is in place it won’t require any additional attention. This can lead to devastating legal costs as the business and corporate laws change over time. An annual legal audit will ensure that your company remains in compliance, that you are doing all that you can to protect intellectual property and address any changes that have occurred over the course of the year or that are anticipated in the coming year.
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