According to business periodicals such as Entrepreneur Magazine Inc. and Forbes, with the beginning of each year comes an increase in new business start-ups. Perhaps this is because people are seeking an increase or alternative means of income, job independence, or a more rewarding career. Whatever the reason, since the Great Recession of 2008, new business filings trend upwards this time each year. Regardless of the time of year, new business owners tend to overlook three important considerations that expose them to financial risk and legal liability. They are:
Meet Filing Requirements
Corporate filing and licensing is a mundane but necessary task. Without proper paperwork, a business may not have “standing” to bring a suit in court because they are not recognized as a legal entity authorized to perform business. Seeking to collect past monies owed or to enforce a contract? “ Lack of standing” is a valid defense to a lawsuit. On another note, if you intend to conduct business in another state, you must also meet that state’s corporate filing requirements.
Create a Meaningful Operating Agreement
Creating a business entity without an operating agreement falls short of good business planning. Failing to detail your own operating agreement generally means that if there is a dispute or corporate governance problem, less favorable “boilerplate” language from a legal form “factory” or state statutory language could be substituted and control how your business relationships operate, contrary to your initial intent. This is especially true where multiple owners are involved, as disputes will invariably arise. If a business relationship falls apart (The Small Business Administration statistics state that one-third (⅓) of all new businesses close in the first five years) it’s best that business owners have predetermined termination terms in their operating agreement, as opposed to having terms imposed upon them by statute or third parties, such as an arbitrator.
Read and Understand Contract Terms
Conducting business on a handshake, however sincere, is a thing of the past and impractical in today’s fast-paced global economy. Business owners encounter contracts in all forms: service agreements, leases, loan agreements, guarantees, joint ventures, co-marketing, purchase agreements and client agreements are to name but a few. Reading through just one of these documents can be daunting and time-consuming. Most “boilerplate” contracts are drafted by attorneys and have extensive and onerous “default” provisions. Don’t “sign on the bottom line” until you have read your contract for meaning. If you don’t understand how a contract provision affects you and your legal rights, then by all means, consult with your own attorney–not a real estate or leasing agent, not your cousin in law school, and certainly not “their” attorney. Consult with your O-W-N attorney. And do it before, not after, you sign a legally binding document.
An Ounce of Prevention
Never is the adage, “an ounce of prevention is worth a pound of cure” more appropriate than in today’s business climate. Experienced business and real estate attorneys regularly address the countless variables experienced by businesses just like yours. Many attorneys will provide new entrepreneurs with a free initial consultation and it’s a solid business decision to take such a meeting.