How to Avoid Common Business Legal Mistakes

Continued from: Part 1

Part 1 of this article discussed the failure of many businesses to use solid written contracts, maintain adequate employee documents, protect their intellectual property, and include key legal provisions on their websites.  Following are some additional legal errors frequently made by businesses, and ways to avoid them:

5. Lack of Buy-Sell Agreement.

Solution

Have a Buy-Sell Agreement clearly defining what happens upon the death, retirement, or termination of employment of one of the owners of the business, or if an owner wants to sell his or her interest in the company.

Comment

The absence of a carefully designed Buy-Sell Agreement can result in a legal quagmire when one of the above events occurs.

6. Insufficient Documentation of Transactions between Company and Owners.

Solution

Have written agreements for loans, leases, and other business arrangements between the company and its owners, usually keeping such arrangements on “arms-length” terms.  Carefully document bonuses and other special benefits to owners.

Comment

The failure to follow these guidelines can lead to adverse tax consequences and weaken the liability shield provided by a corporation or limited liability company. 

7. Failure to Maintain Corporate Records.

Solution

Hold and document periodic meetings of the Board and Directors and the shareholders; record and document issuances and transfers of stock in the corporation; and keep the corporate articles and bylaws current.

Comment

The failure to do these things could threaten the validity of various corporate actions and expose shareholders to personal liability for debts of the corporation.  It also could jeopardize the validity of various tax deductions and credits claimed by the corporation.

8. Failure to Follow Securities Laws.

Solution

Consult a knowledgeable legal professional each before your company sells an ownership interest to anyone or before an owner transfers his or her ownership interest.

Comment

Federal and state securities laws regulate the offering and sale of ownership interests in the company, be it a corporation, limited liability company, or partnership.  These laws may, among other things, limit who you can sell an interest to and how you can go about making the sale.  Failure to comply with securities laws can expose the company to governmental penalties and liabilities to investors.