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Top Ten Legal Mistakes

Top Ten Legal Mistakes

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Published by: sucker21 on Apr 02, 2010
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TOP TEN LEGAL MISTAKES SMALL BUSINESSOWNERS MAKE AND HOW TO AVOID THEM 
Our experience, as well as those of our clients, has left us sensitive to the numerouslegal mistakes small business owners make. We offer this in an effort to help youavoid them.
Pre-Formation
1.
Starting a business while employed by a potential competitor, or hiringemployees without first checking their agreement with the current employer andtheir knowledge of trade secrets.
 The law is clear that if someone is currently working for a company, particularly if heor she is a key employee, they cannot operate a competing business. Even justincorporating may spark a lawsuit from the current employer. Would-beentrepreneurs should first go to their current employer and either resign, or tell themwhat they’re doing and ask them if they’d be interested in investing. Amazingly, thatis often a very smooth way of ending that relationship. Under no circumstancesshould they misrepresent the nature of the new business.Even after leaving the current employer, one cannot use or disclose the company’strade secrets. Under the so-called Inevitable Disclosure Doctrine, if someone has beenexposed to trade secrets at their job and leaves to work for someone else, and if theirresponsibilities in their new job are sufficiently similar, some courts will concludethat it is inevitable that they will use the information they had from the earlierposition. They could face an injunction prohibiting them from working for the newemployer until a number of months go by and whatever trade secrets they had arestale.It also helps to know whether potential recruits are subject to covenants-not-to-compete. States vary in terms of how enforceable they are, but one shouldn’t assumethey are not. One should also check to see what assignment of inventions might havebeen signed. Personnel files should be reviewed and recruits should check theirs, tobe certain that a covenant-not-to-compete or an assignment of inventions wasn’ttucked into a signed non-disclosure agreement.
 
2.
Mistakes When Leasing Office Space
Next to payroll expenses, facilities and related expenses are generally the secondhighest expenditure for a company. Some of the most commons mistakes thatcompanies make when leasing space are:
 
Not using an experienced commercial real estate broker.
 
Waiting too long to start the process.
 
Leasing the wrong amount of space.
 
Picking the wrong location.
 
Not thinking about the future.
 
Not measuring the space.
 
Signing too long or too short of a lease.
 
Not verifying a buildings systems and infrastructure.
 
Not having your insurance carrier review the lease language.
Formation
3.
Choosing the Wrong Ownership Structure:
Choosing an ownership structure isone of the most important decisions you’ll make for your new business. You mustconsider your specific needs. The following factors can help in making your decision:
 
What are the potential risks and liabilities of your business? (For instance,building houses, making edible goods, fixing cars, and selling alcohol carryinherent risks.)
 
How willing are you to spend the money it takes to set up and maintain therecords for a separate business structure (such as an LLC or a Corporation)?
 
What are your expected profits or losses in the first couple of years?Unincorporated business structures let you deduct business losses from your otherincome, but corporations do not.
 
What are your plans for seeking investors? Sophisticated investors oftenprefer the stock structure of a corporation.4.
Consider your potential liability:
There is a summary of the amount of liabilityyou may face depending on how you structure your business.
 
Sole proprietors – Because sole proprietors are personally liable for allbusiness debts, you could potentially lose everything you own if your businessdebts are not paid.
 
Partnerships – Because your partners can make commitments that bind theentire business, your liability may be even greater than a sole proprietorship.Make sure you can trust your partners to protect your interests.
 
 
Limited Liability Companies (LLC) – LLCs are often subject to annual taxesor annual reporting fees. Amounts vary by state and do not depend on whetheror not you turn a profit.
 
Corporations – Corporations are required to keep many different records,including recording every major decision and holding annual formal meetings.If you fail to do so and are sued, a judge can find that the corporation was asham (this if often called “piercing the corporate vail”). Investors can also sueyou if they think you’re not operating the business in their best interest.For most people, starting a one person business, operating as a sole proprietor at theoutset makes sense. But, if your business is especially likely to be sued, is funded byoutside investors, or might be profitable right from the start, consider forming an LLCinstead. For most people starting a business with more than one owner, an LLC ispreferable to a partnership as you get limited liability but need to do less recordkeeping than a corporation, and the same taxation as a partnership.
Post Formation
5.
Mistakes After Incorporating and/or Creating an LLC:
A company that doesnot follow proper formalities may inadvertently create personal liability for itsshareholders or members. In addition, a company that fails to maintain proper recordsmay lose credibility with potential investors performing due diligence.Some of the mistakes small businesses often encounter include:
 
Failing to issue and record stock or member certificates. After forming acorporation or LLC, shares or membership certificates are issued to theowners. Without issuing the share/certificates, there is a potential of havingthe corporation pierced in a lawsuit because the court will claim that thecompany is just an alter ego of the individual.
 
Failure to hold the meeting of the shareholders or directors in a corporation.Every corporation when it is first formed needs to have an initial meeting withthe shareholders and directors in order to adopt the Article of Incorporation,By-Laws and to issue the shares for the company. This initial meeting is alsoan opportunity for members of an LLC to create an Operating Agreement thatis crafted for their particular needs.
 
No resolutions or other documents are kept for the ongoing venture. Everycorporation needs to maintain corporate records and meeting minutes. Acorporation resolution is a written document that gives someone in thecompany authorization to perform a specific action. For example, if thebusiness needs a loan, the resolution would be written and signed with thedirector of the company giving authority to an individual to open the loan anduse it for business purposes. Similar documents should be kept in the LLCformat. Many partnership formations also fail to create necessary initialdocuments, such as having a signed partnership agreement which includes a

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