When you map out your business planning for the new year, how does legal fit into it? For most, it’s an expense in the budget. But does it show up elsewhere in your planning? It should. Yes, legal is needed to “fix” things that go awry, but the real value of legal is in building infrastructure for your business’ future.
Entrepreneurs are savvy and risk-tolerant, so they often build their businesses on instinct and momentum. They may avoid formalities because of a desire to be agile or because they are too busy to put them in place. At some point, though, the informality becomes a burden, not a blessing. Infrastructure is the necessary formalities for a business to avoid risk and scale successfully. Businesses must proactively invest in this infrastructure to create a strong foundation for the future. Think of it like building a house. If even one part of the structure isn’t stable, the entire building is at risk – not just the unstable part. The same goes for the legal infrastructure of your business. Below are a few examples of how legal infrastructure is essential to your business planning and success.
Without question, every entrepreneur I know can read a contract. Most have read hundreds of them. But most of them acknowledge that their eyes glaze over when they get to the sections on indemnification and limitation of liability. Most will also admit that they assume many of these terms are “boilerplate” and don’t spend much time on them. Their focus is on the business terms – as it should be!
The parts of the contract that the business owner doesn’t pay much attention to are the parts that matter most when the relationship goes sideways. It matters who is liable for certain failures under the contract, how disputes will be litigated, and it matters if you get attorney’s fees. These sections determine what your rights are in a dispute. Contracts are the ground rules for a relationship both in good times and in bad times. A contract is an asset of your business – part of your business’ infrastructure. When entering into the contract, you should consider the exposure your business has in that relationship and confirm your contracts appropriately protect your interests. Who is reading your contracts?
For many small, closely-held businesses, governance is an afterthought. They go about their day-to-day making necessary decisions. There’s no formal thinking about whether the President, Director, or Shareholder makes the decision – since they’re all the same people. One critical piece of infrastructure, though, is the formality of decision making. It’s important to clarify who is authorized to make which decisions and ensuring the proper approvals. When or if there is an audit, the governmental agency will ask for these documents because they are legally required. Beyond that, if you have multiple owners, it’s essential to have governing documents that guide decision making, dispute resolution, and transfers.
Many of us know a business owner who didn’t have formal documents in place with a partner and ended up working through a challenging dispute when that partner wasn’t pulling their weight or decided to leave – or in more unfortunate circumstances, passed away. The time to put these in place, like other contracts, is when you’re going into business together. Set the ground rules early so that the unexpected doesn’t destroy the business you’ve built. What roles do you hold in your business? How formally is decision making outlined and documented? What happens to your business if a partner doesn’t show up tomorrow?
Most business owners would say that being an employer is the most challenging part of business ownership. It’s also the riskiest because the laws tend to be very rigid and employee-centric. It’s also about people, and that can be emotionally charged. In my years of business counseling, I’ve found that businesses often have very good intentions regarding employees but don’t realize their good intentions violate the law. Business owners often take a very informal approach to their first employees – a verbal offer, no benefits, and outsourced payroll. They often create policies based on what a colleague in the industry does. There’s not a lot of attention to the legalities. In employment, though, the details matter. Federal and state wage and hour, leave, and discrimination laws change regularly, and few small businesses have a dedicated HR function. Solid employment practices are critical infrastructure to minimize risk in your business. Who’s ensuring your employment practices comply with federal and state laws?
Intellectual Property (IP)
IP is an obvious aspect of legal infrastructure because it’s a valuable asset. Yet protecting IP is often overlooked. IP protection should be central to every relationship. You should consider what formal registrations and contracts protect IP in every relationship. What IP do you own, and is it fully protected?
Legal “infrastructure” is the foundation of a business’ ability to scale confidently. When you know how the risks are allocated under a contract, you can make clearer, more informed decisions for your business planning. Once you are confident that you have control of your business’ decisions, you can take action quickly and decisively. When you have clear, compliant employment practices, you can confidently make employment decisions. Each aspect of legal infrastructure is not about reacting to a third party, but building tools to prepare your business for the situations your business will inevitably encounter.
Enlist Help for Business Planning and Legal Infrastructure
Managing your business’s legal aspects and infrastructure can be complex, and we are here to help. Speak with an attorney to discuss risks involved with contracts, corporate governance, employment, HR, intellectual property, and more. Contact us at 425-250-0205 or firstname.lastname@example.org.
Legal Disclaimer: This article contains general information. Do not view this article as legal advice. Talk with counsel familiar with your unique business needs before taking or refraining from any action.