Even the most successful small business can be undermined by poor legal arrangements. Failing to plan for the possibility of lawsuits or other problems may come back to bite you at the worst possible moment.
As a business owner, it’s your responsibility to do everything within your means to limit risk and to keep the business running smoothly.
But how does one go about limiting the possibility of a lawsuit to ensure business continuity?
Here are three tips for reducing your odds of hitting a legal pothole.
I. Protect Your Intellectual Property
Today, almost every company has some intellectual property (IP)—which consists primarily of patent, trademark, trade secret, and copyright—worth protecting.
For small companies, trade secrets are one of the most important forms of intellectual property protection. Protecting the names of your business, products, and services are also very important.
Protecting intellectual property usually requires:
• Confidentiality and “invention assignment” agreements with all partners and employees;
• Efforts to safeguard your trade secrets, such as locked doors and privacy from prying eyes;
• Trademark registration for company logos, product names, and so forth; and
• Copyright notices on all written materials.
If you do not have a valid trademark, or copyright, it’s crucial that you not only understand why, but also that you take steps to rectify it immediately.
Failure to do so could result in vast amounts of time and money wasted, not to mention possible infringement suits if the reason for your invalidity is that someone else already has the rights.
The process of knowing your rights starts, as with everything nowadays, on the internet.
The USPTO is a great resource for understanding both trademark and patent systems and rights. The Library of Congress’s Copyright Office website is great for copyright.
II. Letters of Intent
When you’re negotiating a business deal and the negotiation is getting serious, you can use a Letter of Intent to protect everyone’s rights and responsibilities, as well as solidifying the relationship between both parties.
A letter of intent can also be a very advantageous and quick way to get momentum for a deal.
The idea for a Letter of Intent is for the parties to get a “handshake” deal on the major points, and then move to creating definitive legal agreements.
You need to be very careful about what you want to be binding or non-binding in the letter. Most Letters of Intent are non-binding and are merely expressions that the parties have a deal in mind and want to further negotiate to a definitive complete agreement.
A company can also use a Letter of Intent to effectively prove to its investors and creditors that the other company is interested in completing the negotiations.
Letters of Intent can be binding contracts, however, so you must be careful what you say and how you say it in these letters.
A Letter of Intent outlines the general plans of the companies or individuals, and allows both sides to plan accordingly. The letter usually includes:
• Specific dates;
• Plans for expanding operations;
• Plans for downsizing operations; and
• Other conditions of a business agreement.
III. Contractor or Employment Agreements
Outsourcing to independent contractors is a great way to get added help, fill a specific need or bring in specific expertise.
It’s also a flexible arrangement when you’re not quite ready or don’t want to create an employee position.
With independent contractors, you don’t have to pay workers’ compensation, payroll taxes or employee benefits. As a result, however, the IRS keeps a lookout for employers who misclassify their workers as independent contractors to avoid paying payroll and other taxes.
As a result, it’s smart to have contract.
An independent contractor agreement explicitly defines the relationship between you and the worker. It should be clear that you intend the worker to be an independent contractor who is responsible for his or her own taxes.
In addition, the agreement should not exert much control over how work will get done. Don’t set specific hours for when they need to work, or where.
The agreement will provide evidence that you intended to hire an independent contractor and not an employee.
While it’s not always necessary for a regular employee to sign a contract, there are circumstances where you will want to memorialize the employer-employee relationship beyond just an offer letter.
Employment agreements are contracts that detail the expectations and obligations of your business and your employees to minimize any potential employee disputes in the future.
Employment contracts are highly recommended for dissuading new employees from disclosing confidential company information, leaving the company too soon after hiring, or leaving the company to go work for a competitor.