Your Business's Legal Foundation: A Proactive Protection Checklist

Most business owners do not ignore legal issues. They are simply busy running the business.

The focus is on customers, employees, revenue, new opportunities, and the next deal. Legal issues often get attention when a contract needs to be signed, a transaction needs to close, or a problem has already developed.

But the best time to find a legal problem is before it becomes one.

A business's legal foundation is not a single document. And it is not something you finish when you form the company.

As a business grows, its ownership changes. New employees are hired. Contracts are signed. Intellectual property is created. New entities are formed. Real estate is acquired. Debt is taken on. Insurance needs change. Partners come and go.

The legal structure that worked five years ago may not fit the business you have today.

That is why every growing business should periodically step back and ask a simple question:

Where are our legal gaps?

The following checklist is a good place to start.

Corporate Structure and Governance

Forming an LLC or corporation is only the beginning.

As a company grows, its entity structure and governance documents should continue to reflect the business, its owners, and the way decisions are actually being made.

Entity Structure

Ask:

Is the current entity structure still appropriate for the business?

A company that started as a small, closely held LLC may now have multiple owners, outside investors, subsidiaries, significant real estate, or plans for an eventual sale.

Different businesses and investments may also warrant separate entities so that liabilities associated with one venture do not unnecessarily expose another.

Entity structure should be reviewed as the business evolves, ideally in coordination with the company's tax advisors.

Ownership and Governance

Operating agreements, shareholder agreements, bylaws, and other governance documents should answer difficult questions before those questions become actual problems.

For example:

Who has authority to make major decisions?

What happens if the owners disagree?

Can an owner sell or transfer an interest?

What happens if an owner wants out?

What happens if an owner dies or becomes disabled?

How are new investors admitted?

Are distributions, voting rights, and economic rights clearly defined?

Are major corporate decisions being properly documented?

The worst time to discover that an operating agreement does not adequately address an ownership dispute is after the dispute has already started.

Good governance creates rules while everyone is still getting along.

Contracts

Every important business relationship eventually comes down to what the parties agreed to.

A good contract should do more than describe the work and state the price. It should clearly allocate responsibility and risk if things do not go according to plan.

Customer and Vendor Agreements

Businesses should periodically review the agreements they use with customers, vendors, consultants, contractors, and other important partners.

Ask:

Are we consistently using written agreements?

Do our contracts accurately reflect how we operate today?

Are payment obligations clear?

Are termination rights appropriate?

Who is responsible if something goes wrong?

Are indemnification and limitation of liability provisions appropriate?

Are confidentiality obligations adequately addressed?

Who owns intellectual property created during the relationship?

Are insurance requirements consistent with the risks being assumed?

One common problem is not the absence of a contract. It is a company continuing to use the same contract it adopted years ago even though the business has changed substantially.

Contracts should evolve with the company.

Employees and Independent Contractors

As a business grows, so does the complexity of its workforce.

Employment and contractor relationships should be properly structured and documented, particularly when employees or contractors have access to confidential information, customer relationships, intellectual property, or other valuable company assets.

Questions to consider include:

Are employees and independent contractors properly classified?

Are compensation arrangements clearly documented?

Are confidentiality obligations appropriate?

Does the company own the intellectual property created for the business?

Are executive compensation and incentive arrangements properly documented?

Are employment policies keeping pace with the company's size and operations?

Are specialized employment issues being reviewed by employment counsel when appropriate?

The objective is not to make every employment relationship complicated.

It is to make sure the documentation matches the relationship and protects the company where protection is appropriate.

Intellectual Property

Many businesses own valuable assets they cannot physically touch.

A company's name, brand, software, content, designs, processes, customer information, and other intellectual property may represent a substantial portion of the company's value.

The first question is surprisingly simple:

Does the company actually own what it believes it owns?

That question becomes particularly important when intellectual property was created by founders, employees, outside developers, designers, consultants, or independent contractors.

Businesses should consider:

What intellectual property does the company rely upon?

Who created it?

Were ownership rights properly assigned to the company?

Are confidentiality and trade secret protections appropriate?

Are important names, brands, or other assets properly protected?

Should specialized intellectual property counsel be involved for registration, licensing, or enforcement?

Finding an ownership problem during an acquisition, financing, or sale is much more difficult than addressing it when the intellectual property is first created.

Insurance and Risk Management

Legal documents and insurance should work together.

A contract may require a company to indemnify another party for a particular risk. But if the company's insurance does not cover that risk, the company may be assuming an obligation it expected its insurance carrier to handle.

That disconnect can be expensive.

Businesses should periodically ask:

Has our insurance coverage kept pace with the company?

Do our contracts require insurance that we actually carry?

Are we assuming contractual liabilities that may not be insured?

Do we have appropriate general liability coverage?

Does the business need errors and omissions, cyber, directors and officers, employment practices, or other specialized coverage?

Are the appropriate entities and individuals insured?

Your lawyer does not replace your insurance professional, and your insurance professional does not replace your lawyer.

The two should be looking at the same risks.

Succession and Business Continuity

One of the most overlooked legal risks is also one of the simplest:

What happens if a key person is suddenly unavailable tomorrow?

For closely held and founder led businesses, the answer can affect employees, customers, lenders, investors, partners, and family members almost immediately.

Consider:

Who has authority to operate the business?

Who can access critical accounts and information?

What happens if an owner dies or becomes disabled?

Is there an effective buy sell mechanism?

How will an ownership interest be valued?

Is there sufficient insurance or liquidity to fund a buyout?

Is business succession coordinated with the owner's estate plan?

Do the company's legal, tax, insurance, and estate planning advisors understand the same plan?

Succession planning is not simply about retirement.

It is about making sure the business can continue when circumstances change unexpectedly.

Personal Guarantees and Exposure Outside the Business

Limited liability does not mean every business owner's personal assets are automatically insulated from every business risk.

Owners frequently sign personal guarantees for leases, loans, credit facilities, equipment, and other obligations. Money may move between related entities. Business and personal assets can become intertwined over time.

That makes it important to understand exactly where the lines are.

Ask:

What obligations have I personally guaranteed?

When do those guarantees expire, if ever?

Can any guarantees be reduced or eliminated during a renewal or refinancing?

Are transactions between related entities properly documented?

Are corporate formalities being observed?

Are personal assets unnecessarily exposed to business liabilities?

Sometimes the most important part of a contract is not what the company agreed to do.

It is what the owner agreed to do personally.

Major Transactions and New Opportunities

Growth itself creates legal risk.

Acquisitions, investments, financings, new partnerships, significant leases, and real estate transactions can affect far more than the individual deal being negotiated.

Before completing a major transaction, someone should be asking:

How should this investment or business be owned?

What liabilities are being assumed?

Are personal guarantees required?

Does the transaction affect other entities?

Does it create new insurance needs?

Are there tax consequences that should be evaluated before signing?

Does it affect existing ownership or succession planning?

Are there agreements elsewhere in the portfolio that could be implicated?

The lawyer working on the transaction may be focused appropriately on getting that particular deal closed.

Someone should also be looking at what the deal means for everything else.

Beyond the Checklist: Someone Needs to See the Whole Field

A checklist can identify the pieces.

The real value comes from understanding how those pieces fit together.

A provision in a shareholder agreement can have tax, insurance, estate planning, and succession consequences. A new acquisition can affect multiple entities and create personal guarantees. An executive compensation decision can raise corporate, tax, and employment issues at the same time.

Successful business owners often have excellent specialists.

They may have a CPA, estate planning attorney, insurance broker, wealth advisor, employment lawyer, intellectual property lawyer, banker, and transactional counsel.

Each may be very good at his or her particular job.

But no single specialist necessarily sees the entire picture.

That is the role of strategic general counsel.

At Floryan Law, we serve as the legal field general. We work alongside our clients' existing advisors and specialized counsel, helping connect the dots between businesses, transactions, assets, contracts, and long term objectives.

We do not need to personally perform every specialized function.

We need to know enough about the client's entire world to recognize when one decision may affect another, identify the right questions, bring in the right specialist when necessary, and make sure important issues do not fall into the gaps between advisors.

The Goal Is Not More Legal Work

Proactive legal counsel should not be about creating documents for the sake of creating documents.

It should be about finding problems while they are still small.

It should be about recognizing risk while the business owner still has options.

And it should be about helping the client make better decisions before those decisions become difficult or expensive to change.

The legal foundation of your business should evolve alongside the business itself.

The goal is not more legal work. It is fewer surprises and better decisions.