This is a guest post by Keri Norris, SVP of Legal and Regulatory Affairs and General Counsel for LegalShield, a legal services provider offering coverage plans and memberships to individuals and businesses. It was originally featured on smith.ai.
Starting and running a small business is exciting and can be rewarding, but many Americans operate their companies without adequate legal protection. Some think that the professional fees associated with all the necessary steps are prohibitive. However, trying to save money upfront can be problematic, even fatal to a company in the long run.
Below are five solutions to common legal risks that independent entrepreneurs and small company owners can proactively implement with help from affordable legal professionals operating through legal and subscription plans.
Create a business entity
Regardless of the nature of the venture, every owner should set up a business entity. There are choices that include a Limited Liability Company (LLC) or a corporation (Inc) and depend upon your business and tax situation. Avoiding entity formation can put your personal assets at risk.
According to the Small Business Administration (SBA), there are over 19 million businesses that instead operate as sole proprietorships. That means that those company operators have not put up a wall between personal and business assets by creating a business entity. Many of these businesses do not have any employees and over 80% declare less than $50,000 per year of revenue. So it’s a chicken and egg problem: Business owners cannot afford a traditional lawyer to set up the needed business entity but, also cannot afford to leave their personal assets unprotected.
Separate your personal finances
Once you have a business entity, it’s equally important to separate your company finances in a business bank account so that your personal money is not mixed together with your business funds. The latter is called co-mingling. If you do not treat your business like a business financially and instead co-mingle your funds, you risk losing the protection of the entity. And it almost goes without saying that you need to have proper accounting systems, to file separate taxes ,and keep careful and detailed records.
Use contracts for everything and everyone (including family)
A handshake is not enough, particularly with friends and family. Contracts for employees, suppliers, customers, and independent contractors are key to running your business while minimizing risk. However, do not just download any contract from the internet. While some provisions are standard, many are specific to anindustry and with employment law varying state by state, you risk having incorrect contracts that are not enforceable. For example, California does not allow non-competition restrictions and many other states do. In addition, legal professionals can tailor contracts to your unique needs.
Identify and protect your assets
Don’t let the old adage, “You don’t know what you've got until it’s gone” apply to your valuable business assets. Whether it’s insurance for your workers, cybersecurity, or physical assets, too many risks exist to make it okay to operate without first protecting your company’s investments, assets, and resources.
Further, the intangible assets (like your business name, products, or inventions; secret processes; customer or supplier lists; and know-how) must first be identified. Many business owners believe that these assets, also known as "intellectual property" (IP), are only for technology companies, large businesses, or for those seeking patents. That's a myth. By not identifying IP such as valuable trade secrets and branding assets, companies can easily lose their IP, and as such, their edge in a competitive or newly emerging market. In addition, ensuring that all IP is properly owned by the company (and not an employee of the company, who can walk away with it) is critical. All companies have some IP and often the protection is not as expensive as business owners may imagine.
Have an exit plan
Many Americans build their businesses to sell them for retirement. Even if the above four steps have been flawlessly executed, many owners have not organized their books and records to set themselves up for a sale. Attorneys must then catch up with documentation, contracts, and more, all of which can delay the process at a significant expense.
Seeking information and professional help upfront is the best way to successfully run your business. To avoid the above legal risks, search for legal advice from a legal plan that has a small-business option to save money and obtain proper coverage. For example, there are subscription-based options like LegalShield’s Launch plan and Small Business plans. The average legal plan is less expensive than hiring a traditional attorney, yet allows small businesses to protect their valuable assets.
Are you a small-business loving attorney?
Grow your small-business practice through LegalShield's network, earn CLEs, and network with other like-minded lawyers who are passionate about closing the justice gap at Legal Shield's annual meeting, Elevate, happening June 20-22, 2019, in Denver, Colorado! Learn more and sign up here.