It is May, 2012, and even though the politicians have declared that the economic disaster is over, America’s economy is still struggling. Unemployment rates have been above 8% for much of the last three years, and GDP growth averaged a miserable 2.2% last year. While our elected officials fight over which policies will get the economy going, many Americans know that any hope for an economic recovery rests on the backs and shoulders of small businesses. For those who are brave enough to take the risk and start a new small business in today’s economic climate, the following tips are offered to help ensure the survival of your business.
1. Avoid Disputes: Read the Contract and Get The Deal in Writing.
One of the major principals of contract law is that a contract cannot be formed without “a meeting of the minds.” This means that both parties must have a common understanding regarding the major terms of the deal. Business owners will have to deal with contract matters in the ordinary course of their business, whether the contract is with the business’ employees or with a manufacturer or supplier of goods. It is important, not only to read the entire contract, but to understand the terms of the contract. Doing so will allow the owner to know exactly what he or she is agreeing to, and such knowledge can help prevent the business owner from entering into a deal that may not be good for the business. It will also ensure that the business owner will get exactly what he or she really wants because they can bargain to strike certain terms or add new terms.
On the other side of the coin, it is critical for business owners to put their deals in writing. This will help keep disputes over the terms of the deal to a minimum, because those terms will in writing. While oral contracts can be enforced in the court of law, their existence can be difficult to prove. Even if the court accepts that an oral contract existed, there will still be an argument over the terms of the contract. Putting the terms of the contract down on paper will allow a business owner to avoid the mess of proving the existence and terms of a contract to the court of law. It will also increase the likelihood that the court will find the business owner has an enforceable agreement.
2. Give Structure to Your Business: Incorporate or Become a LLC.
Starting a business can be exciting, but it can also very risky. One of the ways new business owners can protect themselves is by organizing their business in the form of a corporation or limited liability company (“LLC”). Though there are other types of entities available to business owners, Corporations and LLC’s are the most popular forms of entity because they provide the business owner(s) (or shareholder(s)) the protection of limited liability. The limited liability protection means that the corporation (or LLC) is treated as if it was its own person that is legally responsible for its own actions and debts. Any debt or liability incurred by the entity is not passed down to the owner or shareholder (except in the case of piercing, which will be discussed later); instead, it remains solely with the corporation or LLC. Creditors of the corporation or LLC will not be able to reach the personal property of the owner(s) or shareholder(s) to satisfy the outstanding debt. They can only seek satisfaction of the debt through the repossession and sale of entity assets.
While the corporation and LLC provide limited liability protection, there are cases the courts have pierced the veil of limited liability protection. Courts will allow the limited liability veil of a corporation or LLC to be pierced under the following circumstances:
1) Where the members have comingled personal assets with that of the corporation (“alter-ego theory”);
2) Where permitting the entity to keep its limited liability veil would allow fraud or other injustice to occur;
3) Where the entity is undercapitalized; and
4) In the case of corporations, where the members failed to follow corporate formalities.
If a business owner wishes to maintain the limited liability protection afforded to either of the forms of entity discussed above, they must ensure that their entity has sufficient means to cover the entities debts and keep entity assets separate from their own.
3. Protect Your Trade Secrets, Intellectual Property, or Trademarks
If your business has an innovative new product or method of providing services, take the time to file the necessary paperwork to protect your product or method. The business will be more profitable if its products or methods are the exclusive property of the business. Not only will protecting your product or method give you a competitive edge, but it will allow you exclusive rights to profit from your idea. In order to protect your product or method, you must file a patent with the United States Patent & Trademark Office. It may be necessary to hire an attorney to assist with filling out the necessary paperwork.
Business owners will also want to protect their trademark phrase or symbol. If the business does not have a trademark phrase or symbol, it can be worthwhile to come up with one. The trademark will allow easy identification of the business as it grows, and people will come to associate it with the quality of goods or services the business provides. Not every word or phrase can be protected with a trademark. Following the three rules below will increase the likelihood that your trademark will receive protection:
1) Use words or symbols that the business owner or employees created themselves
2) Use words or symbols that have a common meaning, but their meaning bears no relationship to the good or service; and
3) Use words or symbols that are suggestive of the good or service.
Once the trademark symbol or phrase is created, the proper paperwork must also be filed with the United States Patent & Trademark Office. Please keep in mind that generic words, symbols, or phrases are not protectable with a trademark. Furthermore, a geographical search may be necessary to ensure that other businesses operating in the same area are not using the same trademark words or symbols. For a deeper explanation of the rules for creating a trademark, please visit this website: http://www.jdsupra.com/post/documentViewer.aspx?fid=2fcf0fa8-3814-4e0e-bf73-272b5647bd7b.
4. Ensure Former Employees Do Not Become Your Competitor
One of the most important provisions of a standard employment contract is the covenant not to compete. This contract clause ensures that the employee does not become the business owner’s competitor if the employee leaves the business or is terminated. California courts disfavor covenants not to compete and will rarely enforce them. However, they will be enforced if they are reasonable in scope, geographic area, and time.
For the clause to be reasonable in scope, it can only restrict the employee from performing jobs or activities that would place him or her in direct competition with the former employer. For example, a former employee of a burger stand cannot open up a burger or hotdog stand on the corner across the street from the former employer. However, the former employee could open up a refreshment stand across the street from the former employer because such service does not directly compete with the former employer.
There is no specific rule governing how much time or how big of a geographical area restriction is reasonable. The court will simply examine these restrictions on a case-by-case circumstance and judge whether they are reasonable within the context of the case. Generally, the longer the temporal restriction is, the less likely that the restriction is reasonable. Geographic restrictions will usually be reasonable so long as it is the restricted area is a reasonable estimate for the business’s area of operation.
The covenant not to compete should also contain language that will protect the business’s trade secrets. Included in the definition of “trade secrets” is the business’s customer contact list. Protecting the business’s customer list with a covenant not to compete will provide your business grounds to recover damages from the former employee or their subsequent employer if either attempts to solicit your valued customers.
Following the tips given above will help your business avoid many of the legal pitfalls that can plague a new small business. While some of these tips do require the assistance of an attorney, the expenditure should be worthwhile. The time, money, and effort ensuring that the business is covered from all angles will minimize the need for costly litigation down the road. The less a business has to spend on litigation, the more it can spend on purchasing capital and creating the jobs America so desperately needs.Tweet