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A Business Owner's Guide to Preventive Law

A look at some ongoing steps you need to take to trim your legal bills.

Do-it-yourself works for a lot of things, but the legal part of your business isn't usually one of them. Consider these two scenarios:

 

• A company answers an ad for low-cost do-it-yourself incorporation. After filling out forms and filing with the state, the business believes it is a corporation. A couple years later, the company is involved in litigation. The opposing party proves the company failed to follow corporate formalities and holds the owners personally liable for the final judgment.
• Looking to save on legal fees, two business owners draft a contract themselves for the sale of goods. The description of the goods is vague and when they arrive the owners insist that the goods are not what was ordered.

 

Preventive legal care can prevent hellish situations like these. Like preventive medicine, it promises that in return for following some legal basics, companies can achieve better legal health, including fewer problems and lower costs over the long term.

Large companies know this and maintain in-house legal staff or ongoing relationships with outside law firms. Small businesses, though, often are slower to utilize available services. The reasons for the hesitancy are familiar: distrust of attorneys in general, high cost, and no perceived need. But the effects of not getting regular legal advice often are not apparent until years later, when there is litigation, and the financial ramifications can be disastrous. Properly used, early legal advice can result in cost savings, reduced tax liability, and less litigation altogether.

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Areas that should be reviewed in a legal checkup:

Choice of business entity. S-corp., C-corp., other; regardless of where a company is located, there are a number of choices of entity available. An attorney should review your current form to make sure it is properly formed and the best choice for your business. The attorney should also recommend whether any additional structural work is warranted. Example: If you are a closely-held U.S. corporation, you should have a shareholder's agreement.

Current and potential contracts. Do your contracts have an attorney's fees provision? An arbitration provision? Should you have either or both? Both provisions can result in significant savings if you do end up in litigation, but there are risks associated with each. Make sure you understand them.

Also, do your contracts cover areas of liability? Could they be redrafted so costs are shifted to the other party? Example: Manufacturers can add a bold-print clause requiring that the customer pay for shipping of returns after 30 days. Given adequate notice and a reasonable time restriction, customers usually don't complain, and your costs can be reduced.

Relationships in which there is no written contract. Businesses should be aware of whether words and actions have resulted in an oral contract binding a business to terms that may prove burdensome if circumstances change. Example: A manufacturer uses a particular independent distributor. At meetings, the manufacturer talks glowingly of their future together. A few months later, the manufacturer finds a better distributor and makes the switch. The first distributor sues, alleging that it had an oral contract for a continuing relationship. A written contract making it clear that termination was allowed at any time would have minimized the likelihood of legal action.

Employee relations. Do you have a contract with your employees? Have you done or said something that would create a contract? Are you in violation of any laws of your jurisdiction? A legal audit should walk you through these questions and answers.

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Both the Civil Rights Act of 1991 and the Americans with Disabilities Act encourage employers to use alternative dispute resolution rather than take disagreements between management and employees to court. Companies are increasingly turning to such alternative techniques instead of legal action to save the money and the heartburn involved in court battles. Any civil dispute can be handled with arbitration, but it works best when the two parties must continue working together. Two booklets, A Guide to Mediation and A Guide to Arbitration, explain the advantages of nonbinding mediation and legally binding arbitration and the types of disputes they can resolve, and then outline each process. They also include a list of American Arbitration Association (AAA) offices nationwide. Both booklets are free from the AAA (212-484-4000). --Phaedra Hise, from the April 1994 issue of Inc.

How to select an attorney:

You should select an attorney with the same effort and care that you would select any other professional or employee. Do not hire the first attorney who agrees to represent you. It is important to find one you trust and who can handle your needs.