With 2022 approaching, it is a great time for businesses to review their legal health in preparation for the new year. Below are five key issues to consider.
(1) Maintain business separateness and good records
Many businesses operate as separate legal entities (i.e., LLCs or corporations). Creating a separate entity provides owners with greater personal liability protection for the business’s debts and liabilities. To retain the veil of limited liability protection, however, businesses must maintain the required separateness of the corporate entity from the owners’ personal affairs. For example, the business should be sufficiently capitalized, maintain separate business accounts that are not commingled with personal accounts or expenses, separately track business finances, record all corporate meetings, decisions, and transactions, and put contracts, invoices and purchase orders in the company’s name. These steps, among others, help prove that the business is legally separate from the owners and insulate owners personally from liabilities of the business.
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(2) Have written contracts
Strong and clear contracts are essential for business health. Especially in businesses with multiple principals, consider having internal governing agreements even when state law does not require them. Operating agreements, partnership agreements, and shareholder agreements clearly define the rights, roles, and responsibilities of individual owners (both to the company and to one another) and give them control over the rules and procedures that are best suited for their business. Many states, including Arizona, have default statutes that apply to certain entities such as LLCs in the absence of a written agreement. Having a properly drafted governing agreement can prevent the application of undesired legal defaults.
Other important business contracts, as applicable, include: products/services agreements, vendor/supplier contracts, confidentiality/non-disclosure agreements, investor agreements, liability waivers, indemnity agreements, licensing agreements, and property and equipment leases.
Be wary of online templates. Contract drafting involves deliberate language. Online templates are often vague, overbroad, out-of-date, or written for different jurisdictions. The inclusion or exclusion of certain contract terms can unintentionally create undesired legal obligations or ambiguities and can negate rights a business thought it had.
(3) Manage the team
Businesses should consult with experienced employment counsel to ensure compliance with the myriad of federal, state, and local laws that govern the employment relationship. Other important employment issues to consider include:
• Compliant hiring process
• Written employment agreements
• Proper classification of employees and independent contractors
• Non-competes/non-solicit agreements
• Confidentiality/non-disclosure agreements
• Clear employment policies
• Employee handbooks
• Employee training
(4) Protect intellectual property
Businesses should not underestimate the value of their intellectual property (IP). Almost every business has some IP that is worth protecting, such as secret recipes, inventions, technology, processes, and even a unique business name with logo. Certain businesses also have trade secrets and other proprietary competitive information to protect using written agreements and processes designed to maintain their confidentiality. For trademarks, copyrights, and patents, consult experienced legal counsel about formally registering them or taking other legal action to protect the IP from mis-use by others.
(5) Protect against litigation
Be proactive to help avoid litigation. Many lawsuits result from poor documentation, lack of written contracts, or poor planning or execution. Take action now to update written contracts, understand agreements already signed, keep detailed business and employment records, keep licenses up-to-date, pay all necessary taxes, review and update insurance coverage, and consult with other professionals as needed.
If, despite best efforts, litigation occurs, do not ignore it. Consult early with legal counsel to prepare the best strategy (including potential early resolution) and ensure that all documentation is properly preserved.