Less than a year into launching HireAHelper in 2007, co-founders Mike Glanz and Pete Johnson were close to turning a profit. But the owners would soon find themselves fighting to keep their moving-services marketplace alive, when industry behemoth U-Haul sued the startup over a trademark dispute. "We were just about to break even--and all of a sudden we were looking at five- and six-figure legal bills coming in," says Glanz, CEO of the Oceanside, California-based company.
Soon the founders were embroiled in a three-year court battle that drastically upended their company's plans. Until the litigation was settled out of court, the process forced them to try to be as strategic as possible--in the courtroom as well as the boardroom. "Paying for those types of legal bills when you're a year old is incredibly difficult, so we had to pick and choose our battles," Glanz says. "There were some motions we couldn't fight because we just didn't have enough money. From a business standpoint, we had to be equally strategic in picking what opportunities we pursued."
Preparing for the possibility of legal troubles--and quickly responding to any hints of their brewing, such as receiving a claim letter about copyright issues--can be critical to surviving a challenge. Small businesses spend more than $100 billion a year on litigation, according to the U.S. Chamber Institute for Legal Reform.
Unfortunately, experts say, many entrepreneurs put off the legwork that can help them avoid problems down the line: "It's the penny-smart, pound-foolish approach to legal preparation," says Neal Salisian, a Los Angeles-based attorney focused on small and medium-size businesses. So take a few minutes to plan how to get out of legal hot water--or to avoid it in the first place.
1. Shop around.
When you're looking for an attorney--during the startup phase or when there's a problem looming--talk to more than one candidate. And "spend a little time talking to established business owners," says David J. Leffler, a New York City attorney who represents small to medium-size companies on business matters. Ask successful companies in your industry what kinds of legal issues they've faced, how much they pay in fees, and if they can refer someone. Glanz adds that he would seek out someone with expertise on the type of trouble you're facing, and examine how that person has handled similar cases. The vast majority of civil lawsuits ultimately settle pretrial, so make sure to look at how a potential lawyer has dealt with that process before, he says: "If you know, statistically, that you're going to settle this case, are you going to pick the lawyer who settles a week before trial or the lawyer who settles within a month?"
2. Right-size your help.
While there might be an attraction to choosing a larger firm for guidance, small firms will have lower fees and be more likely to offer services or expertise tailored to smaller businesses. Leon Rbibo, president of jewelry businesses the Pearl Source and Laguna Pearl, who does most of his sales online, discovered this after a Supreme Court ruling last year that found retailers may be required to collect sales tax even in states where they don't have a physical location. Now facing new standards in about 30 states--as opposed to one--Rbibo expects his annual legal expenses for 2019 to at least triple because of setup costs and all the additional filings. "We went through some trial and error where we turned to some legal resources--but it's very expensive," he says. He ultimately settled on using an automated tax-compliance system designed for smaller companies, occasionally tapping an attorney when necessary.
3. Talk it out.
While some legal disputes are unavoidable, it's worth remembering that many disagreements can be resolved outside the formal legal system. Trying to have a frank discussion with the other party, or even hiring a mediator, can save a lot of time--and considerable expense--in the long run. "When I talk to people my age and younger, we have a tendency to do everything digitally and via email to avoid confrontation--but when it comes to legal troubles, you've got to pick up the phone and get in front of the other person and find common ground," says Glanz, who is 36. "It's almost always worth trying to discuss in person or carry on a conversation prior to getting lawyers involved," he adds. One exception: In cases where you're doing business with family members and have potentially emotional relationships, sometimes calling in a mediator right off the bat makes sense.
Start your business on the right foot
Taking small steps early on can eliminate some big legal risks.
Get it in writing. Make sure you have an operating or shareholders agreement in place with any co-founders. "We're friends now, we're on the same page, but a lot of times, down the road, people have differences, and there has to be something in writing if they want to resolve it fairly," says Erica DiAngelo, a business and intellectual property attorney in Tampa.
Hire smart. Draw up formal employment contracts. Also, be clear on whether someone is an employee or consultant--or prepare yourself to pay big fines. "If you misclassify, you can have serious problems," says business attorney Leffler.
Claim your identity. Trademark your company's name to avoid branding headaches. "That way you don't start putting money into your signage and marketing only to find out later that someone is already using it," says DiAngelo.
Act like a business. "When you're setting up a company, formalities should be observed," says Leffler. So set up a corporate website, business cards, company email accounts, and a separate bank account. Otherwise, he adds, a vendor or client could say they're naming you personally as a defendant because they didn't know that a company was the owner of the business.