Home » Business Owners’ Guide to Avoid Being Taken to Court
- Draft Invoices and Contracts to Prevent Legal Problems
Your business’ invoices and contracts provide important opportunities for you to prevent legal problems, and to tip the balance of any dispute in your favor. For example, do your invoices and contracts contain venue choice of law provisions, limitations of your liability, or waivers of express and implied warranties?
- Respect Organizational Formalities
Regardless of how your business is operated, protection against personal liability for your business’ debts can be achieved only by respecting the organizational formalities of your business form. If organizational formalities are not respected, then courts will “pierce the entity’s veil” from liability protection and impose liability directly upon the owners of the entity. At a minimum your business should observe the following formalities: 1. The business entity should be funded with adequate capital and ownership certificates should be issued in exchange for capital (money, property or services) actually contributed to the entity; 2. The entity should carry liability insurance in an amount customary for its line of business; 3. Business funds should not be commingled with personal funds; 4. Contracts should clearly be signed in your representative capacity; 5. Meetings should be held at least annually; and 6. Required annual reports should be timely filed with Secretary of State.
- Safeguard Your Confidential Business Information
Every business possesses some type of valuable confidential business information which constitutes a trade secret. A trade secret is broadly defined as any information that is significant enough that you would care if your competitors had access to it. A trade secret may consist of anything from a customer list to a secret process or formula regularly used in one’s business. In order to establish that specific information constitutes a trade secret, a business must show that it took reasonable steps to protect and maintain the secrecy of the information.
- Enter Into Buy-Sell Agreements with Co-Owners
A buy-sell agreement is designed to protect the owners of an entity, and provides for the acquisition of the interest of an owner upon his or her withdrawal from the business whether by death, disability or other reasons, including, an inability to agree upon managerial and operational issues. Buy-sell agreements benefit the entity and its owners by: 1. Preventing outsiders or heirs, whose interests may conflict with those of the remaining owners, from obtaining an ownership interest; 2. Ensuring the continued legal existence of the entity on the death, disability, withdrawal, bankruptcy or expulsion of an owner; 3. Ensuring continuity of management and control by the remaining owners; and 4. Creating a market for the shares of a deceased, retiring or withdrawing owner
- Confirm Employment At-Will Policies
The employment at-will doctrine provides that an employment for an indefinite term may be terminated by either the employer or the employee, at any time. Under the employment at-will doctrine, an employer is free to discharge the employee at any time and for any reason. Implement this doctrine within your workforce by: 1. Including “At-Will” Wording in your Job Applications; 2. Confirming your “At-Will” policy in Your Employee Handbook; and 3. Includiing “At-Will” Wording your Employment Offers and Contract.
- Habitually Prepare Written Confirmations
Virtually every important oral communication with those outside your company is worth confirming in a letter, a memo, or a note. Written confirmation will bring misunderstandings to the surface early, will clarify expectations, and will document your views and positions.
- Use Alternative Dispute Resolution Techniques
Virtually all contractual arrangements can contain provisions that call for resolving disputes by alternative dispute resolution (ADR) techniques such as mediation and arbitration. Mediation involves the use of a neutral third party mediator to facilitate the resolution of dispute between the parties. The mediator only helps the parties reach a mutually agreeable resolution of the dispute. In arbitration a private party serves as a judge and after hearing both parties’ side of the dispute, makes a decision concerning the resolution of the dispute. Both mediation and arbitration are considered to be less costly, more expeditious, and more effective processes for privately resolving disputes by an impartial person selected by the parties themselves.
- Conduct Employee Background Searches.
Surveys indicate that one-third to one-half of all job applicants will provide employers with information containing material inaccuracies. In order to protect the integrity of your job application process, it is advisable that you conduct general background checks on all job applicants. In recent years, numerous lawsuits have been brought against employers for the negligent hiring and retention of employees with histories of criminal, violent or harassing behavior. In many instances, these suits often occur when an employee with a criminal record is hired to perform duties involving a high degree of public trust.
- Verify Documentation Supporting Employee Terminations
It is imperative that the decision to terminate an employee be subject to an independent review and that the employer apply its discipline and termination policies in a consistent fashion. The review should focus on the sufficiency of the basis for the termination, and verification that documentation of the factors leading to the termination are contained in the employee’s personnel file. In instances where immediate action is required, e.g., continued employment threatens the safety of others, the offending employee should be terminated pending an investigation. The immediate threat will be eliminated and a potentially ugly situation can be avoided.
- Don’t Ignore Potential Legal Problems
Finally, and most importantly, if you feel a lawsuit is inevitable (or merely likely), don’t ignore it. An open line of communication with the other side may be your best option. If not, lawsuits are often won or lost at the inception. Many lawsuits start with one or more nasty, demanding letters. These must be responded to. Unanswered, the other side will argue you never had an answer. Despite the temptation to respond in kind, your tone should remain objective, be written in a professional tone, and not contain “legalese.” A jury will see through the set up letter drafted by a lawyer. Have the business people draft the letter and let the company’s lawyers review and comment.