Starting a new business, expanding an existing one, or dealing with any other type of singular event, from purchasing a house to creating a will, the legal landscape is complex. Many see hiring an attorney as a costly burden and decide, instead, to navigate on their own or by trying to rely on templates available online.
Generally, however, to be caught out cheaply early on will almost always come back to haunt the company down the line. Small errors can have long-lasting consequences, such as lengthy disputes, regulatory fines, and huge financial costs. Therefore, outline below five key legal mistakes which can end up costing you huge amounts of time and money, and how to avoid them.
1. Failing to Put Agreements in Writing
Perhaps the most common–and most expensive–mistake both individuals and businesses make involves depending on a “handshake deal”. In numerous jurisdictions, an oral agreement is enforceable; distinguishing the specific agreement made by the parties is extraordinary.
Once a dispute exists, it quickly degrades into a “he said, she said” situation. The only way to settle such disagreements where there is no documentary evidence is to launch a long discovery process, conduct depositions, and render yourself at the mercy of the courts in costly litigation. This may last for a significant amount of time, pumping money out of your pocket.
Why Written Contracts Are Non-Negotiable
Clarification of uncertainties: Any contractual term has been clarified in the writing document: it precisely defines the participation, deadlines, required deliverables, and loads of each party, and payment conditions.
Pre-Determined Dispute Resolution: Well-drafted agreements will create clear guidelines for what will happen if an issue arises. This includes whether the parties are required to use mediation, arbitration, or certain court processes.
Protection of Relations: Same as above. Conditions are clearly put down in writing before proceeding, which protects the business relations no less than the personal relations.2
Confirmation of Purpose. In the event that you need to enforce your rights, you will have a signed agreement setting the parameters, and your lawyers will be able to sort out the issue fast.
2. Using One-Size-Fits-All Online Templates
There are plenty of free and cheap legal templates available online of every kind, from NDAs to commercial leases. It might seem like getting a boilerplate legal agreement is a quick and easy way to save money, but it can give a false sense of security.
Law is very jurisdictional and fact-sensitive. Contract templates written under California law may include provisions that are simply unenforceable or even unlawful in Texas or New York. What’s more, boilerplate documents are intended to be generic. They do not account for the particular and idiosyncratic circumstances, risks, and needs of your particular case or sector.
The Hidden Risks of Generic Boilerplate Forms
Old-sided jurisdiction clauses: Templates won’t include recent legislative amendments or quirks in a particular territory, so you may find a local judge can render your contract unenforceable.
Unanticipated loopholes: It is intentionally broad and has huge gaps that can be taken advantage of by a clever adversary, so that they walk away from what is owed.
Overly General Intellectual Property Clauses: Common business contract templates sometimes automatically assign ownership of proprietary concepts, design, or code to independent contractors, rather than maintaining ownership for the company.
If you use a generic form, the liability caps may be overly limited and may not be enforceable under your home state’s consumer protection laws.
3. Mishandling Intellectual Property (IP) Protection
When it comes to today’s businesses, everything from your brand name, trademarks, any proprietary software, or product designs would be considered the most valuable intellectual property you would possess. However, entrepreneurs often hold back from registration as yet because of the registration fees they would have to pay up front.
Without earlier registration of trademarks, patents, or copyrights, you will have opened the door for competitors to mimic all your efforts with impunity. Additionally, there’s the possibility you could inadvertently infringe on someone else’s existing IP. If you spend three years establishing your brand and then receive a cease-and-desist letter because you didn’t conduct a proper trademark search at the outset, rebranding, replacing inventory, and updating sales and marketing will bankrupt many a fledgling business.
4. Misclassifying Workers and Violating Labor Laws
With the expansion of the gig economy, numerous organizations often want to cut costs by turning to contractors whose fee structure is significantly more attractive than a salary and benefits. No OT pay is necessary, and there are no tax withholdings of payroll taxes.
Regardless of what you call the position, the authorities assess the real working relationship. If you control when, where, and how they do the job, you can expect regulatory agencies to consider them employees. Improper classification could lead to audits by the IRS and state departments of labor with back taxes, burdensome interest costs, and fines.
5. Ignoring Corporate Formalities and “Piercing the Veil”
Starting an LLC or Corporation is a smart business decision because it provides a wall of protection between your business liabilities and your Personal assets. If your business is sued or can’t pay a debt, your home, savings, and possessions are theoretically safe.
That protection, though, is not automatic or permanent. In order to keep it, you need to follow the formalities for running a corporation. If you co-mingle business bank accounts with your personal piggy bank, don’t have regular annual meetings, or don’t file state reports, an opposing attorney can petition a judge to “pierce the corporate veil.” If the judge is convinced, you face personal liability for the company’s legal and financial misfortunes.
The takeaway: In the legal world, you get what you pay for. A little time and money in the initial stages of consulting a competent attorney will always be far less costly than the cost of engaging a litigator to get you out of hot water.
