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How Do Small Businesses Avoid Legal Trouble?

Legal issues can be among the biggest threats to small business success. Entrepreneurs can be prepared by making a few smart decisions at startup.
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Legal issues can be among the biggest threats to small business success.

When they do arise, it’s important to get good advice. However, the best advice is to avoid individual issues in the first place.

Five ways to reduce the likelihood of facing a conflict in court.

1. Get it in writing. From the first day your business opens its doors, written contracts, even simple ones, are a central part of daily operations. This is particularly true if you have business partners. Even a simple partnership with two people rarely has a balanced workload and balanced skill sets. Documenting rights, responsibilities, ownership and investments can save you lots of headaches later. Great startups have had rocky roads between early partners. Modern companies such as Apple and Facebook have well documented rifts among early stakeholders. Even family aren’t immune. The Kellogg brothers radically disagreed on the best course of action for their company, which later became a cereal giant.

2. Employment contracts are essential. It’s likely that your first employees will be part-timers that work hourly or even on commission. As the individuals and the company become more successful, disagreements between employers and employees about the value of those employees can often create legal problems. Every employee should have a contract, regardless of the size of the company or the size of the employee’s role. Today, even small employers add non-compete and non-disclosure agreements to every employment contract from day one. It’s bad to have a highly valuable employee leave your company. It’s worse if they go to your competitor.

3. Your brand is your biggest asset. Create and register trademarks very early. Additionally, make sure you own the assets related to those trademarks. Logos, domain names, and other important assets can be the catalyst to significant legal battles as your company becomes more successful. In the 70s NBC was sued because a logo in which they had invested multimillions of dollars had already been trademarked by a small university television station. In the 1990s, presidential candidate George W. Bush failed to register GeorgeWBush.com and they spent more than $1 million to acquire it from a savvy squatter.

4. Operate like a big business, even if your small. Some entrepreneurs and micro-businesses become faced with separating personal and business assets. Establish your LLC or S Corp. Create separate business bank accounts. Organize your business in subsidiaries if you have divergent streams of revenue. Make sure the business owns trademarks, copyrights, and other intangible assets. Selling your business or acquiring more financing is much easier when the lines between business and personal, and the organizational structure of the business entities are clear.

5. Call the bluff. Every business has dissatisfied customers occasionally. They will frequently jump from dissatisfied to “I’m going to sue you” very rapidly. These customers feel that creating fear will bully you into a bad business decision. However, litigation is typically unfavorable to everyone involved. You can deflect the “I’m going to sue you” attack in most cases. Try this: simply respond, “I would like to work this out amicably with you, but if you are truly planning to sue my company, this is the contact information for my attorney, and I must cease all communication. If we can keep lines of communication open, I believe we can resolve the situation. Do you still intend on suing us?” They should quickly realize that the only winners in a legal battle are usually the attorneys. Truth be told, if someone is actually planning to sue, they usually give you very little advance notice.

When small businesses think like big businesses, they can likely avoid the expense and disruption of legal disputes.


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