LEGAL CHECK-UP: How to Keep your Business Flying High
By Jeffrey A. Robinson, Robinson & Robinson, LLP

Before taking off, the pilot carefully inspects the plane and its operating systems. Minutes later, the pilot speeds along at cruising altitude, 10,000 feet above the mountains and cities. The cockpit dashboard is covered by lights, gauges, and instruments – each designed to flash a warning or indicate needed action. The pilot guides the plane to its destination safely because all the gauges are functioning properly, and the pilot analyzes the information provided and follows their instructions.

If you were the pilot, and the business was your plane, could you say the same? Do you check your operating systems? Do you follow all the gauges, instructions, and warnings? Do you even have the instruments in place to warn of potential problems?

There are at least 10 basic areas most business should assess regularly to determine whether the legal aspects of their operations are functioning properly. Correctly installed and periodically checked, these legal systems will help your business stay at cruising altitude. Otherwise, the business may crash the first time it encounters turbulence.

Business officers responsible for legal affairs should be able to answer the following questions:

1. Is the business organized to protect the owners against potential liability?
The legal form a business takes will determine the level of risk the owners face. Usually, corporations and limited liability companies protect against liability better than partnerships.

Whatever form a business takes, the owners must make sure it is properly organized, with updated records of stock issuance or ownership, and so forth. Formal corporate records must be kept up to date to avoid the owners’ potential liability to the company’s creditors. These include documentation of annual meetings, board meetings, resolutions, and election of officers. In addition, state agencies require periodic filings of corporate information.

Beyond formal organizational records, the business should properly document any agreements between the owners concerning the way the business will be run. For a corporation, this could include shareholder agreements. Owners may also want agreements covering possible problem areas, i.e., buyout plans, succession or sale of an owner’s interest to other parties. Old agreements may need updating.

2. Is the business properly licensed?
Another often-overlooked area is licensing. A business should know what licenses are required, keep them current and maintain adequate records. Licenses start with the basics, such as a city business license. Beyond that, particular personnel or owners may need state licensing: stockbrokers, insurance salespeople and contractors, for example.

3. Is the business protected against unwarranted customer claims?
Most commercial businesses should have a written contract with customers establishing their respective duties. If not, they are missing a significant opportunity to control business risks.

Contracts should take advantage of all available legal protections to shield the business from liability. These include statutory limitations on liability, limitations on warranties, indemnification, claims procedures, etc.

Many businesses have contracts, but are in such a hurry to get the sale – or so worried that a signature requirement will kill the deal – that transactions are consummated but never properly documented. Unsigned contracts are useless. So are contracts that aren’t filed. Once you have the agreement, keep it so it can be accessed if disputes arise.

Businesses must also be able to document proper service to customers. In case of a challenge, systems should be in place to document compliance with contract requirements and with quality control procedures.

4. Is the business protected from problems caused by its vendors?
Problems with vendors can hurt a business’s customers. A commercial business should keep written contracts with important vendors and periodically review its vendor agreement forms.

Ideally, vendor forms should hold the vendor responsible to the maximum extent possible, according to the prevailing standard in the industry. The business should ask for adequate guarantees, warranties and indemnifications. Restrictions on lawsuits against the vendor should be minimized.

Consider third-party insurance. Depending on the industry, the vendor may be asked to provide insurance. If so, the business should keep a copy of the vendor’s current certificate of insurance to reduce business risk.

5. Does the business comply with all applicable governmental regulations?
Do any governmental agencies regulate the business? Regulations can cover matters as varied as car pools or transportation plans, air quality emissions and wastewater discharges. The business should carefully document the steps it takes to comply.

6. Are proper employment practices followed?
Proper management of human resources can raise complex issues, since there are so many state and federal laws governing employment practices.

A properly updated employee handbook can be a first step in avoiding liability. Use of written employment agreements – reviewed by an attorney – can also help reduce liability exposure.

The company should comply with workplace laws, such as the Americans With Disabilities Act, OSHA, and federal and state wage and hour laws. Many companies assume they are in compliance without really checking.

The company should also assure that it has proper procedures in place to guard against discrimination, harassment, and other illegal actions by employees. Failure to have these in place before a claim is filed can cause significant liability.

Beyond these basics, the company should also document employee hiring, discipline and firing decisions.

7. Is important business information protected from misuse?
Most businesses have valuable information. A company should assess that information to determine how to protect it from loss, theft, or misuse. Patents, copyrights, trademarks, trade secrets, confidential information – all can and should be protected.

A company with confidential information should develop and use a nondisclosure agreement form. These should be used with employees and other businesses (such as vendors, customers, or strategic partners) that may have a need for limited access to this information.

In addition, the company should assure that confidential information is labeled as such. If the business does not treat its own sensitive information confidentially, it often cannot require others to do so.

8. Does the business properly handle important state, federal and local tax matters?
Everyone knows about taxes, and most people pay attention to them. Keep it up. The business should assure itself that it is properly withholding and paying payroll tax items, and keeping records to document all tax affairs.

9. Does the business have a proper risk control procedures, including appropriate insurance?
Many businesses should pay more attention to the level and nature of their liability policies and other insurance. Each business should review its insurance policies periodically to determine that there is coverage for major risks and liabilities. A knowledgeable broker can streamline this process.

10. Are there any outstanding issues that the business has been putting off but knows it needs to resolve?
Sometimes businesses know they are at risk, but keep putting off a resolution. It is better to be proactive and have a plan for resolving issues not already addressed.

Planning and preparation will help your business fly higher and longer, avoid turbulence, and arrive safely at your destination.

(Jeff Robinson is a partner in the law firm Robinson & Robinson, LLP.  The Irvine-based law firm has a "Legal Check List" that can help you plan. He helps businesses avoid and resolve commercial liability problems both in and out of court. He can be reached at (949) 752-7007 or jar@rrlawyers.com .)

 

Disclaimer. This article is provided for general information only. It is not an all-inclusive list of legal issues that may confront your business. Consult your legal advisor on all legal issues. Robinson & Robinson, LLP does not provide legal advice unless specifically retained to do so.