Protracted litigation can be very expensive. Legal fees skyrocket, and the stakes are often high. Lawsuits are sometimes unavoidable, but businesses can greatly reduce the risk by avoiding five common mistakes:
1. Not drafting a clear shareholder agreement, operating agreement, or bylaws. If a company has more than one owner, they should clearly define their respective rights and obligations at the outset. It’s easy to overlook this step during a company’s start-up phase when everyone is optimistic. However, when tough decisions and disagreements inevitably arise, clearly defined rights and duties help resolve disputes.
2. Entering into contracts without seeking legal advice. Many lawsuits can be avoided and results maximized if contracts are drafted or reviewed by an attorney. It will cost far more later to litigate over a contract than it will to have an attorney involved when it’s drafted.
3. Failing to protect intellectual property. Intellectual property laws are complicated and often counterintuitive. Nevertheless, wise businesses take steps to protect their own intellectual property and to honor the intellectual property rights of others. All businesses should have a plan to deal with trade secrets, non-compete agreements, copyrights, trademarks, and the like.
4. Commingling business assets with personal assets. Proper accounting is important not only for tax and business reasons but also for legal reasons. Business owners can lose an entity’s shield against personal liability when they fail to adhere to corporate formalities or commingle business property with personal property. That million-dollar company loan might turn into a million-dollar personal liability if company books and funds aren’t properly maintained.
5. Failing to define employee relationships. Employer-employee relationships present a myriad of risks. Whether a person is an employee or independent contractor, a contract employee or at-will employee, or assigned to this duty or that can all have important legal consequences. Clearly delineating the company’s relationship to its workers and defining the scope of each worker’s duties can significantly reduce the risks of litigation.