Agreements are the heart of your business. Indeed, your entire business is one vast series of agreements: agreements with investors and lenders, clients and vendors, employees and contractors, as well as partners and customers. Yet, despite the critical role they play in a company’s success, far too many business owners fail to take their agreements seriously.
Whether it’s winging it by creating your own agreements or using cheap, do-it-yourself (DIY) legal documents you purchase online, failing to treat your legal agreements with the respect they deserve can seriously cost you. In fact, just one poorly constructed agreement could end up costing you tens of thousands of dollars in attorney’s fees and court costs—or even put you out of business entirely.
Last week, in part one, we covered the first 5 of 10 pitfalls that can put your company in serious jeopardy if you take the DIY route with your legal agreements. Here in part two, we’ll cover the five remaining pitfalls that you’re likely to encounter when going it alone with these vital documents.
06 | FAILURE TO GIVE YOURSELF AN OUT
In addition to terminating an agreement due to a breach, you need to consider how the relationship might end due to any number of other circumstances. By giving yourself a clear exit strategy, rather than being caught off-guard or surprised when things change, the relationship can successfully adapt to the transition with ease.
For example, when entering into an agreement with a new business partner, you should think about—and plan for—all of the ways each of you might potentially exit the business. What would happen in the event you decide to sell the business? What would happen if the business failed, and you had to close your doors? What will happen when one (or both) of you dies or if one of you becomes incapacitated?
You need to get clear about all of these eventualities, and then document them in the appropriate agreements, including your operating agreement, bylaws, and/or buy-sell agreement. Moreover, it’s best to prepare these agreements—and your exit strategy—early on in the relationship, when you are still on good terms and have high hopes for the relationship’s future.
Otherwise, it’s likely going to be much more difficult to agree on a solution, without dealing with unnecessary conflict—and in the worst cases, costly litigation—just to get yourself out of the relationship. As your Personal Family Lawyer® with business planning expertise, we can ensure that your agreements provide you with a clear exit strategy that will allow you to get out of the relationship with the least conflict, liability, and expense possible.
07 | FAILURE TO ADDRESS CONFLICT RESOLUTION
Along with having an exit strategy, your agreements should also address how to resolve any disputes that may arise—preferably without resorting to litigation, which ideally is a last resort. To this end, consider adding terms to your agreements that require alternative dispute resolution processes, such as mediation and arbitration, before either party can file a lawsuit.
By including a clause requiring mandatory mediation or arbitration in your agreements, you can have better control of potential disputes before they occur, and you can help ensure contractual conflicts are handled in the most productive manner possible, without getting stuck battling one another in court.
08 | NOT PROTECTING YOUR INTELLECTUAL PROPERTY
Your intellectual property (IP) is among your company’s most valuable assets, and as such, it needs to be fully protected in your legal agreements. This is especially important when working with independent contractors.
Unlike employees, with whom you generally own automatic copyrights to everything they produce while working for you, contractors typically retain full copyrights to their work—unless they’ve signed a written agreement stating otherwise. In fact, if you don’t have properly drafted agreements in place, you may not even own the work you’re paying someone to produce for you.
To secure ownership of your IP, you need to include work-for-hire and copyright assignment clauses in every contractor’s agreement to ensure you actually own the work you are paying for. And yes, this means every single person, even those you may have worked with for years without a single problem.
Beyond contractors, it’s vital to ensure your IP is protected from all other potential threats, such as competitors, clients, and even partners. From filing for trademarks and copyrights on all of your IP to adding limitations-on-use provisions to your agreements with clients and customers and including clauses that assign ownership rights of IP brought into the company by partners to your business (rather than the partners themselves) in your operating agreements or bylaws, as your Personal Family Lawyer® with business planning expertise, we can ensure your agreements include the necessary terms to ensure your IP has the maximum protection possible
09 | AGREEING TO BROAD INDEMNITIES FAVORING THE OTHER PARTY
When you indemnify another party in an agreement, you are agreeing to compensate them for any losses they incur in specific circumstances. Such terms can also force you to compensate the other party, if something you do—or fail to do—causes the other party to experience a loss, damages, or a lawsuit from a third party. And often these indemnification provisions are buried in boilerplate that you aren’t reading and wouldn’t even necessarily understand if you did read the terms.
In all but the rarest of cases, you should never agree to indemnify the other party against all possible claims related to the product or services you provide. To prevent this, be sure to have us, your Personal Family Lawyer® with business planning expertise review your agreements before signing to ensure you don’t get stuck paying for things the other party should be responsible for.
10 | BECOMING A PERSONAL PARTY TO AN AGREEMENT
Read this carefully, and then practice it without fail—never, ever sign a legal agreement for your business in your own name. Every legal agreement you enter into for your business should be signed in your company’s name, not yours.
By signing an agreement in your own name, you are placing your personal assets at risk, even if you typically enjoy liability protection because your company is set up as a limited liability company (LLC) or corporation. As with mixing personal and business finances and failing to abide by administrative formalities, signing a company agreement in your name is one of the instances where your “corporate veil” can be pierced, allowing creditors to come after your personal assets to settle a claim against your business, even if you have an LLC or corporation set up.
Every legal agreement, no matter how seemingly minor or trivial it may appear, should be signed in your company’s name, rather than your own. And while you’re at it, make a commitment to never sign another legal agreement without having us review it first.
GIVE YOUR AGREEMENTS THE PROPER RESPECT
Just as you would never try to wire your office’s electrical systems yourself if you weren’t an experienced electrician, you shouldn’t try to do the same with your company’s legal agreements by acting as if you’re a lawyer. When it comes to such a critical component of your business, you should always consult with a licensed and experienced professional like us.
Whether you need new agreements created or want us to review agreements you already have—even those drafted by another lawyer—meet with us, your Family Business Lawyer® with business planning expertise. We will support you to not only create clear concise agreements, but also implement an agreement process that will allow you to more effectively navigate the inevitable changes that take place in every relationship, while dealing with conflict in a way that’s both healthy and productive. Call us today to learn more.
This article is a service of Michele Hyndman, your Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Schedule a LIFT Planning Session or call us today at 754-253-8825 to schedule.