Every business has exposure to legal liability. From our experience, legal threats hideout in five core exposure areas. If unchecked, these threats can suddenly cause inconvenience, significant expense, embarrassment, and even catastrophe to the business. And yet, the business owner is often unaware the threats are even there. The first step to drawing out and reducing these threats is to understand the five core areas of exposure.
Area 1 – Company Structure: This area deals with your owner agreements, member resolutions, company minutes, intercompany agreements between multiple LLCs, and many other parts of your business related to governance. For example, your business can become exposed to liability by not operating your business separate and independent of yourself. If a court believes that your business is completely dominated by you, then it may allow creditors and third parties to “pierce” the company liability shield and get to your personal assets. Making sure you have an executed and well-prepared operating agreement (or other owner agreement) can help document the legal independence of the company. If your business operates out of multiple locations or pursues multiple business lines, then you might consider segregating these different ventures into separate LLCs. If your business has multiple LLCs, then you need to consider which entity should own and control all the value intangible business assets (e.g., logo, website, etc.). Intercompany agreements should be drafted to create arms-length transactions around the licensing of intellectual property and allocation of administrative costs.
Area 2 – Labor & Employment: This area deals with your labor force and the terms and conditions of employment. Federal and state labor and discrimination laws have a substantial impact on how you hire, fire and retain employees. For example, we recommend every business with employees have an Employee Handbook and include policies addressing “No discrimination”, “How to report Employee Grievances”, “Personal Appearance in the Workplace” and many other similar policies. Although Federal discrimination laws generally only apply to employers with more than a certain number of employees, state law imposes civil liability for assault, battery and intentional infliction of emotional distress. These state law claims can all apply equally in a discrimination fact pattern. The Employee Handbook can help protect the employer by providing a clear way for employees to report grievances or perceived discrimination before the employer can become liable for such acts. Additionally, the Fair Labor Standards Act imposes rigid employee recordkeeping requirements and dictates when an employee is subject to overtime and minimum wage, among other things.
Area 3 – Contracts: Every company has its own customer contract. Sometimes, the company refers to its customer contract as its standards terms and conditions. If prepared properly, these contracts can contractually limit the company’s liability (e.g., by excluding consequential damages) and provide more leverage in the event of nonpayment. Additionally, every business engages vendors and many of these vendors will also have contracts. The business needs to be sure the vendor properly indemnifies it for losses caused by the vendor. To the extent the vendor creates intellectual property (e.g., a logo), that the business can only retain ownership of those assets by contractual agreement.
Area 4 – Intellectual Property: Every business owns intellectual property (“IP”). The name or names used to market and identify the company’s goods and services in the marketplace, for example, constitute valuable IP. Ensuring others do not infringe on this IP (or your business does not do the infringing) is key to long-term success. Also, the company’s handbook, operations manual, procedures, know-how and other key processes and systems in your business oftentimes constitute valuable and proprietary information. Employees, vendors and others with access to this information should be required to execute non-disclosure agreements.
Area 5 – Leases & CRE: Every business either leases space or owns the real estate. Even home-based businesses can have a lease to document which portion of the home is used for business purposes. Leases contain all sorts of pitfalls. For example, commercial landlords almost always require a corporate or personal guaranty. The guaranty presented by the landlord is often broad and for the full term of the lease. And yet, the landlord will oftentimes agree to limit the guaranty to a shorter period or limit the liability to one year or to the base rent, or to both. Also, the tenant should always insist on a requirement by the landlord to mitigate its losses in the event of a default.
The above examples are not meant to be exhaustive. They simply illustrate the types of exposure that often exist in the five core areas. We recommend every business engage a legal team to inspect the business in the five exposure areas above and to draw out legal threats. The team engaged must be proactive, rather than merely reactive, to reducing and eliminating exposure.
Free Exposure Inspection
Let our team proactively prevent legal exposure and operate as your in-house legal team by offering you a free exposure inspection. To learn more about how the experienced attorneys at InPrime can help reduce your legal threats and limit exposure, contact us at 770-282-8967.
Disclaimer: The blog should not be used as a substitute for competent legal advice from one of our licensed attorneys.