Although launching a new business brings with it potential opportunities for growth, there are also plenty of pitfalls to look out for. What often separates business failures from success stories is the ability to handle details, anticipate problems, and make sure business agreements are clearly written and understood.
When small business owners rely on verbal agreements, boilerplate contracts and do-it-yourself approaches to contract management, they may be unknowingly setting themselves up for costly legal problems. As attorney John C. Woodman advises, it's better to err on the side of caution than leave yourself exposed to possible lawsuits and contractual disputes.
He recommends anticipating and addressing all issues that could arise, regardless of whether a potential misunderstanding or disagreement seems likely to happen. For example, some business owners balk at the idea of signing formal contracts with people they consider good friends or with whom they have a long-standing relationship. However, "it is always best to have a written agreement negotiated between the pertinent parties," Woodman said.
Since damage control is much more expensive, stressful and time-consuming than preventive action, Woodman urges business owners to get legal advice before a potential issue turns into a crisis.
"A reliable attorney can ensure you're buttoned up from a legal perspective, so you can focus on running a successful business instead of facing a 'do-over' or putting out a legal fire down the road," said Woodman, a business litigation and creditor/debtor rights attorney at North Carolina-based Sodoma Law P.C. "Too many times, I've seen business owners seek legal counsel when matters are 'hot,' rather than preparing for all eventualities."
Covering your bases with business contracts
To steer clear of misunderstandings, false assumptions and ambiguity, Woodman recommends that contract terms be clear and concise. One method of assuring that all parties fully understand the intent and meaning of contract provisions is to include definitions of important terms in the document. He also said that "the subject matter and the material terms should be ironed out beforehand" to reduce costs and keep the process moving forward efficiently. A letter of intent is typically used to lay the groundwork for many business agreements, he explains.
Woodman believes one of the primary mistakes small business owners make is to use generic contract templates. He points out that state-specific clauses often need to be incorporated into business contracts and that every agreement should be customized and fine-tuned to fit the situation.
"Each vendor, financing or employment agreement should be carefully crafted to ensure all eventualities are covered," he said.
Corporate legalities to consider
Setting up a corporation improperly can create a ripple effect of problems when it comes to contracts, especially regarding the way your company is taxed, pays its employees and limits liability. Woodman noted that documents like shareholder agreements, partnerships and operating agreements are the constitution of a company and need to be accurate.
"If, for example, your agreement states that your business is a corporation when in fact it should be a limited liability company, that's going to be a problem [in the future]," he said.
One important detail executives and business owners sometimes overlook is whether a contract should be executed by an individual or a business entity, such as a corporation. Woodman says that's a potential error that can and should be avoided.
"If the party to sign is the corporation, execute the contract in the name of the corporation. If the party to sign is the individual of a corporation, sign only in the individual's name and not the capacity of the corporation," he added.
An ever-present legal threat Woodman strives to protect clients from is financial liability. He noted that if your company isn't set up correctly and you're unaware of that fact when contracting in your company's name, any disputes could fall back on you as an individual.
"If you follow the correct corporate formalities from the outset, anyone with whom you engage who turns [a business situation] into a dispute is less likely to be able to reach your personal assets," Woodman said.