Business is challenging enough without legal disputes, which divert resources and management attention from productive business matters. Yet ‘resourceful’ business owners who rely on online legal information rather than lawyers’ advice risk waiver or compromise of important rights, and perhaps penalties for violating applicable law.
Despite careful planning and good intentions, disputes sometimes arise among partners or members of start-ups and small companies regarding payment of compensation, return of capital upon departure, buyouts, compliance with franchise agreements, or indemnification against liabilities to lenders, landlords or vendors. A well drafted Partnership or LLC Operating Agreement usually anticipates many eventualities regarding the members’ respective obligations to provide and replace investment capital, rights to compensation and vote for significant changes (e.g. sale of the business) or buyouts of individual members who leave the company. Yet unanticipated events (including a member’s noncompliance with the Operating Agreement) may result in costly litigation among the members. For example, a departing member of a franchised business most likely remains jointly liable for the lease, loans and franchise fees unless his co-owners indemnify him. A member who establishes a competing business may be enjoined from exploiting proprietary customer lists, marketing information or trade secrets owned by the company. Negotiation or mediation provide alternatives to litigation that may conserve the company’s resources and preserve key relationships necessary to continue operating productively. But when litigation ensues, consult me for a frank assessment of the legal risks, discussion of negotiation strategies and alternative means of dispute resolution.
Employees are the living resources upon which business depends, yet can become a significant source of liability if a company acts unaware of applicable employment law and best practices regarding hiring, payment of wages and other compensation, funding workmen’s compensation insurance, supervision of social media, performance evaluation and promotion, and termination, among others. Some employers have been penalized for misclassifying employees as independent contractors or ‘highly compensated’ employees exempt from overtime, attempting to evade obligations owed to employees. Consult me before implementing any ‘novel’ employment policy to confirm that you are on sound legal footing.
Small businesses are often governed by numerous complex contracts: leases, loans, insurance, telecommunications and computing services, and franchise agreements, among others. Often a company’s obligations are documented in promissory notes secured by liens or mortgages in property or receivables, or personally guaranteed by owners or third parties. Even a single missed payment default may trigger extreme remedies (e.g. entire future loan or lease payments may become legally due immediately). If a business is unable to meet its current obligations due to cash flow, it is incumbent upon the owners to respond promptly to any notice of default with a legally sound negotiating proposal to modify the contract or forestall exercise of default remedies before litigation ensues. After suit is filed, a company’s owners cannot represent the company, but are required by law to engage a lawyer to represent the company, so consult me if you receive any letter raising legal claims to we can discuss strategies to mitigate potential liability.
Frequently business principals will informally negotiate joint ventures or partnerships with other businesses, or financing arrangements with lenders, generally agreeing to ‘deal points’, reserving final agreement until their lawyers are able to document the terms in a comprehensive contract. Yet preliminary ‘term sheets’ have been held to be enforceable despite such reservations where the other party made significant investments in reliance on the deal before the opposing party declined to execute the agreement, usually due to a disagreement on details not raised during negotiations. In retrospect, early consultation of a lawyer during negotiations, and hiring a lawyer promptly after assertion of enforceability of a preliminary, informal agreement, may avert costly litigation and damage to potentially fruitful business relationships.