Entrepreneur Insight

Best Legal Practices for Small Business

Make sure contracts are properly worded and budget for legal expenses.

Seeking professional legal advice may seem like a luxury most small businesses can’t afford, but doing so will save them money in the long-run. Although some business owners may feel that they don’t need to bring in legal counsel until their business is more established, they should actually consult an attorney from the get-go. Getting the right legal help can position a business for success and assist with their growth trajectory. Businesses that don’t, run higher risks of failing, says Morvareed Salehpour, an attorney who specializes in small business legal consulting.

“It’s always important, from the very beginning, to structure your business appropriately and to structure your transactions appropriately,” advises Salehpour. “Businesses that don’t do that often end up getting into trouble, from compliance side issues, to issues with their contracts, if they don’t have the appropriate agreements in place and aren’t complying with the laws.”

Establish a budget for legal expenses

Salehpour recommends that every small business dedicate a portion of their budget to legal expenses. “You should put a good 15 percent to legal and accounting expenses,” she says. However, Salehpour adds that the legal budget depends on the complexity of the business, and companies like tech startups will likely need to devote a larger portion than service businesses. She also advises that, as a business grows, they should increase their legal budget to accommodate their needs and to support further growth.

Larger companies will sometimes hire an in-house general counsel to advise them, but Salehpour says that doesn’t make sense for many small and mid-sized businesses. Instead, she recommends that smaller businesses work with general outside counsels, who typically have broader experiences across industries and can provide advice on a variety of issues.

(Photo credit): Gettyimages.com/Kittisak Jirasittichai / EyeEm

Although some business owners believe they can simply draft their own contracts, they may not have the necessary knowledge of the legal system to ensure they are properly protected and adhering to the applicable government regulations.

“If they go to someone who doesn’t have that general outside counsel experience, they’ll have to hire multiple attorneys, and it’s going to get really costly because you have three or four attorneys looking at the same thing,” shares Salehpour. “Someone who acts as general outside counsel is able to provide that multi-level review because they have experience in several areas of law.”

Although Salehpour recommends that small businesses work with an attorney, she says it doesn’t necessarily mean they need to keep a lawyer on retainer. Some businesses may be established enough where they know they will need a certain amount of legal assistance every month, which they can then work out with their outside counsel. Otherwise, they can just reach out to their attorney on a need basis.

“Most of my clients will reach out to me as things come up and then reach out to me again as other things come up,” says Salehpour. “With all these small and mid-sized businesses, they need assistance with multiple things across the year, but it’s not going to be every day—it’s not necessarily even going to be every month.”

Employee and vendor contracts

All businesses will need contracts, even when they’re first starting out, says Salehpour. “You have ones with your own vendors, then you have agreements with your employees if you have employees, you have consultant agreements,” she continues. “If you have intellectual property that you’re licensing, then you have licensing agreements. You may have confidentiality agreements with parties you’re dealing with if you’re a startup or media entertainment company. You have contracts if you’re in a lease—you also have an agreement with any sort of equipment you’re leasing.”

For employee contracts, Salehpour says that quite a few businesses can unintentionally violate employment laws because they are misclassifying employees and contractors, or are unaware of the wage and hour regulations for employees. Key things to include in employee contracts are the type of employee (hourly or salaried, full-time or part-time), the services the employee is providing, what benefits the employee will receive, and the process and circumstances of termination. For companies that have intellectual property, Salehpour says to consider confidentiality agreements to protect trade secrets if an employee leaves a business. Businesses can also protect themselves by including non-compete agreements, which prevents employees from entering into markets or professions that directly compete with the business when they leave the company (within certain limitations), and non-solicitation agreements, which are contracts that exclude people from soliciting a business’s current employees or customers after leaving the company.

Similarly, vendor contracts should have provisions that state the scope of services and confidentiality agreements on proprietary information. They also need to include an agreed-upon price for products or services, and how to “exit” the contract; usually, contracts will end after delivery or completion of a project. It’s also imperative to include a clause if there is a breach of contract, so that both parties know what to expect and what to do—otherwise, Salehpour warns, it might need to be resolved in court.

When to consult a legal expert

Although some business owners believe they can simply draft their own contracts, they may not have the necessary knowledge of the legal system to ensure they are properly protected and adhering to the applicable government regulations.

Salehpour shares that she once had a client who had found an existing vendor contract online and just cut-and-pasted that contract, as is. However, that client was unaware that the contract stated that payment was contingent on the original drafter of the contract approving the payment.

“This person ended up in a situation where none of his customers actually had to pay him, and customers had taken advantage of that,” she says of her client. “That’s something he could have easily avoided if he got a properly drafted contract. It would have been worth it now that he’s losing out on tens of thousands of dollars because he didn’t have the contracts in place, and now he’s having to spend fees to dispute all of these with them.”

Salehpour recommends that business owners seek legal help from the start of a business. Entrepreneurs need to form a separate business entity so that they are not personally liable for any potential business debts or lawsuits. They should seek a qualified legal professional from the inception of their business, so that they can consult with them on the most appropriate business entity to achieve their goals, structure it properly and plan out the legal assistance throughout the years.

“Even the form of business entity that you choose has effects in terms of your ability to do things, like how you operate, how you raise capital, what kind of taxes you are going to be liable for,” explains Salehpour. “What is your plan? What are you trying to accomplish in this first year? The next two years? Five years? That way, the client and myself can work towards those goals, so we can structure the legal to make sure you’re meeting those.”

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