FINANCE

Topic #22: Legal Aspects of Business

  • Just because it’s legal, don’t assume it’s the right thing to do

  • Lawyers are advisers not business people so you need to make the business decision

  • Given free reign, your lawyer will protect you so much that a deal will not be doable

  • It’s essential to get the lawyers involved, at the right time, or you will spend needless money

  • Lawsuits consume a huge amount of management bandwidth — a lot more than you think

  • Have boiler plate legal documents like Non-Disclosure Agreements (NDAs) created and on hand.

  • Contracts will probably be the most interaction you will have with your lawyer.

A business operates within a legal framework that, for the most part, works. This legal framework has a long history and many reams of laws and regulations that will make your head spin. At some point, most companies will have to deal with some sort of legal issue related to their business. Don’t be afraid of this. I won’t lie. It’s scary when someone wants to sue your company but the legal system, for all it faults and issues, does provide a reasonable framework for resolving business disputes.

What follows is meant as an overview to get you exposed to the legal aspects of running a business. As most of you know, I am not a lawyer nor do I play one on TV. So, if you have legal questions, please seek out professional advice.

Legal Entity

All businesses are categorized as some sort legal entity that governs the way they are treated under the law. Some structures (like LLC’s, C-Corps, S-Corps or LLPs) are considered free standing entities that have special rights (e.g. They can enter into contracts) and the owners have limited liabilities. While others, most notability the sole-proprietorship, the owner assumes all the liability and rewards. The type of entity you pick will depend a lot on your liability profile and whether or not you will have investors. Just remember that the law treats different entities according to criteria that will vary, so make sure to become familiar with you structures particular laws.

Compliance

Compliance to local (city and county), state and federal laws will be something that all businesses will need to deal with. Unfortunately, these laws vary enough that it makes sense to call up your local chamber of commerce or local government and have them give you a reference. In general, your biggest compliance headache will be in trying to figure out what taxes you owe, employee rules and safety laws.

In most cases, compliance is left to the business owner and as long as the taxes are paid on time and no one registers a complaint, most government departments will not be knocking at your door. Compliance becomes challenging when the law changes or you assumed you did not have to perform a certain task. In these cases, ignorance of the law is no excuse. So, to cover yourself and your business, ensure that you get “no need to comply” decisions in writing. That way, at least you will have a something in writing as to why you did not comply.

Contracts

Most businesses will enter into a contract with a person or another business at some point in their existence. These contacts are what define how the working relationship will be carried out and who is responsible for what deliverables or payments. Contact language can vary but in general, most contacts will have standard boilerplate provisions such as:

  • Definitions: All contracts will have a section that will define the terms used in the contact. The most typical terms that will be defined include the parties entering into the contract and what the project is they will be working on.

  • Notice: This refers to where any communications should be sent or which parties are responsible for the contract.

  • Governing Law: What laws govern the contract. This is usually a county, state or country.

  • Entire Agreement: Says that no other agreements are required to execute the contact. This is usually done so that it’s clear what the contact is and what it depends on.

  • Force Majeure: Extraordinary event or circumstance beyond the control of the parties such as riots, acts of nature, government collapse, etc. This term says that if these types of events happen, that the parties are not responsible for the consequences.

  • Term and Termination: How long the contact is good for and what causes the contract to terminate.

  • Payment Schedules or Deliverables: All payments related to the contract and what tangible thing (be it code, hardware or documents) will be delivered in order to receive payment.

  • Severability: This means that if a term in the contract is determined to be illegal that does not nullify the entire contact, just that section

    or provision.

  • Warranties And Indemnities: Usually deliverables are warranted against defects of craftsmanship or other things. Indemnification says that the seller says that they have the right to sell or transfer the properly and will fight any lawsuit against the receiving party.

  • Default: What is consider a breaking or breach of the contract. This usually spells out specific instances or events that trigger remedies or ways that a party can collect when the other party triggers a default event.

  • Counterparts: Means that the contact can be signed in parts and put together as a whole document without everyones signature appearing on the same page.

  • Confidentiality: Says that certain items, terms or pricing will remain confidential. It sometimes deals with intellectual property disclosure but those types of issues are usually handled via a Non Disclosure Agreement (NDA).

There are many, many more sections of a contract, depending on the type but the ones above are almost always in a contract. Make sure you do a little research before you contact a lawyer since that will save you time and money.

Resolving Disputes

The legal system is setup to resolve disputes. These disputes usually revolve around some sort of breach of contract, violation of intellectual property or breaking a law. When you are faced with a legal action, it’s best (and I mean it) to seek out counsel to assist you in navigating the nuances of the legal system. Once you have contacted a lawyer, there are a couple of things you should do right away. These include:

  • Remain calm: Lawsuits happen. Don’t freak out just because someone wants to sue you. Relax. Take a deep breath and go find a lawyer.

  • Don’t call your adversary: Whatever you do, don’t call your adversary until you have talked to a lawyer. Whatever you say in the heat of passion will be used against you. If you have to vent, go yell at a wall.

  • Gather up all your documents: Start to collect any and all documents that relate to the matter. Be as detailed as you can be.

  • Keep a Notebook: Any conversation or phone call or meeting related to the law suit or action you should write down in a dedicated notebook just for the particular matter. This is important since you can use these notes during a trail. Remember to number, date and sign the page.

  • Write down everything you know: In your notebook, write down as much as you can recall about the matter. Keep a list of questions you need answered and things that may be fuzzy.

  • Read the contract: Go dig up all the old contracts related to the matter and reread them to ensure you understand what’s in them.

  • Discuss with your partners/employees: When appropriate, disclose as many details about the suit as you can. It’s important to be open with partners and employees about legal dealings. In some cases, your partner or employees may hold valuable insights into the matter.

There are a lot of companies who abuse the legal system and these companies make it miserable for everyone else. So, don’t fly off the handle and sue people. Rather, a lawsuit should be your absolute last resort if you can’t find a equitable solution to your problem.

A Necessity That’s Not That Evil

Having good corporate counsel will make your business better. I know, it feels like a necessary evil but it’s really just part of doing business. Just like all your hires, you need to find the right lawyer for your stage of business and work with them like they are part of your team.

Things To Ponder

  1. Look up a lawsuit among two businesses in your market. What is the lawsuit about? What are the major points of contention? Write a couple of paragraphs on how you would approach resolving the conflict.

  2. Review one of your companies contracts. List the terms and sections. How many of them seem generic? What are some of the default conditions that could lead to a lawsuit? Write a paragraph on why the contract was written the way it was.

  3. Analyze your competitors and figure out which one is likely to sue your company. How would you react? What steps can you take to prevent a lawsuit? Write a paragraph on how you would handle it.

  4. Look up all the laws your company has to comply with. How many are there? What are the consequences for failing to follow them?

  5. What type of legal entity does your business operate under? What special privileges does that grant it?

Exploring Further

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