While often overlooked by many businesses, strategic management of legal risks is essential to the long-term health and sustainability of a business. Successful business leaders who have built businesses that withstand the test of time understand this crucial truth: devoting your life, time, passion, and assets to a growing and vibrant business could be all for naught if you are exposed to a fatal legal risk. What follows is a slit of seven of the most common legal risks faced by small and medium-sized businesses.
1 – Legal Structure Risk Exposure: Small and medium-sized businesses have several options when choosing legal structure. The most common choices are limited liability companies, corporations, partnerships and sole proprietorships. Choice of legal structure for your business results in drastically different results in terms of taxation, liability, required documentation, etc. Moreover, the legal structure dictates how management and operations decisions are to be made. It is paramount to understand the pros and cons of each legal structure option, to be knowledgeable regarding the structure you’ve chosen, and to keep records and business documents up-to-date and compliant. Mistakes in this area can lead to lawsuits and devastating personal liability.
2 – Employment Law Risk Exposure: Employment law claims and lawsuits continue to be on the rise in Oklahoma. Employment laws are complex and ever changing. In fact, the two most common business lawsuits involve wrongful termination and discrimination claims from employees and former employees. It is important to know and understand the most common employment law risks and to have a current and comprehensive employee manual that is consistently followed.
3 – Securities Law Risk Exposure: Raising capital for your business may involve taking money from investors in exchange for some type of claim on the ownership or profits of your company. State and federal government agencies closely regulate this process and those who fail to follow state and federal securities laws can face hefty fines, the possibility of having to return investor money, and even the threat of criminal charges. Most business owners are surprised to learn that most capital raising activities other than traditional bank loans may be subject to complex state and federal securities laws. Failure to understand and follow the rules in this area can lead to serious trouble for you and your company.
4 – Regulatory Risk Exposure: Your business, or parts of it, may be subject to state and/or federal governmental regulation. Government agencies promulgate complicated rules, policies, procedures, and/or guidelines that must be followed or you and your company may face civil and/or criminal penalties. Businesses must understand the specific regulations that apply to their activities and implement compliant policies, procedures, and protocols. You do not want to learn about your company’s regulatory obligations as the result of an enforcement action.
5 – Contract Risk Exposure: Contracts are the basic agreements that govern the relationships between your business and its suppliers, partners, and customers. Whether your company drafts the contracts or simply executes them, failure to know, understand, and comply with contract terms can result in inconvenience, disagreements, and even financial loss. Moreover, operating on a “handshake” deal with no written terms can result in unmet expectations and costly litigation. Best practices require that all of your important agreements be in writing. That being said, a poorly drafted contract can be worse than having no written contract at all. This is another area where a relatively small investment in legal work can pay big dividends down the road.
6 – Partnership and Succession Risk Exposure: Even the best business relationships can turn sour. In addition, death, disability and other changes in circumstances are nearly inevitable in any long-term partnership. Does your business have a plan in place (a well-drafted buy-sell agreement, for example) to help it survive the disruption caused by the death or disability of a partner? Do you have an orderly way to unwind a business relationship in the event the vision of goals of the participants diverge? Many a good business has imploded due to a failure to plan ahead in this area.
7 – Insurance Risk Exposure: The legal environment of business dictates that successful businesses have the proper insurance coverage in place. There are many different types of insurance coverage. Not all policies are the same and may or may not cover certain losses. The most common form of coverage is general commercial liability coverage (“GCL” coverage). Many insureds are shocked to learn that their GCL policy excludes many risks all together and significantly limits coverage of others. Moreover, insurance policies are long, complex documents full of coverage limiting provisions, endorsement, and exclusions. It is important to understand exactly what your insurance policies cover in light of the risks specific to your business. You should work with a knowledgeable professional familiar with your business and industry to determine your coverage needs and to identify any gaps in coverage.
When it comes to understanding, managing, and mitigating legal risk exposure, an ounce of prevention is worth a pound (or more) of cure!