Because we are helping clients with new inventions, our offices sees many new businesses. Some are second or third businesses who have fewer problems, having learned lessons the hard way. But many people come to our office to develop an invention by applying for a patent, or worse, maybe they have just been sued. There are a few major mistakes we see over and over, so we try to ensure that our clients can avoid the predictable and disastrous results that come with them. Here are a few of the lessons we'd suggest you take to heart.
Business Entity - Business Formation
Business entities protect the owners of a company from personal liability. A person may begin the patent process without one, but as soon as you have protectable intellectual property, you have something of value that makes you a target of lawsuits, whether it is a simple new baby bottle, or the name of a new business that someone else might be using.
By using a business entity, you provide a layer of protection against these lawsuits. That protection comes in helpful if someone else decides that you are using a name that is too close to theirs, or if a major customer decides that your product caused an expensive problem, the protection of a business entity keeps your assets from being the target of the suit.
We recently helped a client in financial distress who desperately needed to recalibrate his business relationships and finances with either a law suit or bankruptcy filing. He was running a business that had more than $60,000 in monthly income...as a sole proprietorship. During that time, he had obtained certifications under his own name that he could not transfer to a business entity, if we started one for him. He was stuck in a limbo of his making, due to a lack of planning, and extracting him from that position was time-consuming and expensive. In the mean time, the lawsuits and debts he had accumulated were more difficult to resolve.
This is just one cautionary tale. We could tell many. The business entity of choice for new small businesses tends to be a limited liability company, usually referred to as an "LLC". (Note that the "C" stands for "company" and not "corporation".) In some situations, based on the motivations of a company's ownership, a limited partnership is better, or a full corporation. Only after visiting with an attorney experienced in business matters can a proper answer be made to this question.
Written Operating Plan Attorney.
While business entities protect business owners from outside suits, business owners use operating plans to control internal relationships. Operating plans are contractual documents that establish lines of management, the responsibilities of each owner, methods of ownership change, and financial practices. Entities which do not have a written operating plan experience a much higher rate of internal strife and business failure..
We often see businesses that are failing because they were created by family members that have no written contract between the owners, which might be two brothers, or an aunt and niece, or even forty-year friendships established between high school locker mates. In all these cases, our office has had to represent individuals in law suits that should never have happened, but were the direct result of a missing document that would have eliminated the dispute by putting the understanding between them on paper.
Ensure contracts and change orders are documented.
Legal disputes are often the result of business partners who have made a change in the way that they work together, but have not put the new understanding in writing. We recently were able to settle a lawsuit caused by unwritten work orders to major construction projects. The failure to properly document these changes in any way allowed the parties to have good-faith disagreements that later resulted in the impoverishment and destruction of a 75-person construction business, now reduced to a six-man organization.
In these businesses, even a consultation with our attorneys can help you establish practices to minimize your exposure to business practices that tend to be improperly documented, whether it is a construction change order, or a commission rate change in a sales representation contract. Call us today at our Arlington, Southlake or Weatherford, TX office, 817-704-3984 or contact us online!