Business owners must make several decisions when structuring and executing their business plans, but carefully considering a legal arrangement that is customized to their needs may be most important. We asked four local law experts to provide their advice on some important questions about legal protection as a business owner.
How can an attorney help when you’re starting a new business or adding offerings?
CHRIS EDWARDS: An attorney can be an invaluable partner when you’re starting a new business. For one thing, your attorney will be able to advise you when you pick the legal structure for your new business. Will it be a corporation? Will it be a limited liability company? Those are questions that your attorney can help you understand and answer. Likewise, when you’re hiring employees, an attorney can help you draft their employment agreements. These may include specialized clauses, like a non-compete or a non-disclosure agreement. An attorney can also help you understand the importance of these clauses in protecting your business’ trade secrets. Moreover, whether you’re starting a new business or adding a new offering, an attorney can help you understand the legal ramifications that your decision will have. For example, if you expand your business and hire more workers, you may find your business covered by more federal and state laws and regulations; such as, if your business grows to 15 or more employees, it becomes covered by Title VII of the Civil Rights Act, which prohibits certain types of discrimination. In that instance, you may want to adopt certain policies or procedures to build a record and to show that your employment practices are non-discriminatory. An attorney can advise you on best practices. Likewise, certain industries are regulated or require licenses. An attorney can advise you about the needed licenses and can help you understand the limits on your permits or licenses.
MITZI KINCAID: An attorney can offer an explanation of the laws that might impact you as a business owner and solutions for navigating those laws. If you’re thinking of adding new products or services, an attorney can discuss your risk analysis to ensure your new offerings are protected.
RUSSELL NUGENT: First, an attorney can assist you in picking a business structure and understanding what needs to be done to maintain the limited liability afforded by your business form. In addition, an attorney should be consulted regarding the limitations of limited liability as no corporate form insulates you from all liability. An attorney can and should be involved when you draft governing documents such as operating agreements and by-laws. If you are buying an ongoing concern, an experienced attorney can not only draft documents for the transaction, but they can provide advice to solve or at least limit future problems. Last, but certainly not least, an attorney can help you protect intangible assets such as your company and/or brand name and the technology developed by or for your business.
CHRIS HINNANT: An attorney can help almost any business owner, no matter the size, geographic location, or type of business. Almost any aspect of commercial activity has some degree of associated legal issues, and a lawyer can help a business owner anticipate and navigate those issues. The sooner a business owner engages a lawyer, the sooner that lawyer can get to know you, your business and the aspects of your business that uniquely affect your decision-making process.
How should business owners decide between forming a sole proprietorship, partnership, LLC, corporation or another structure?
KINCAID: This decision hinges on three major factors; taxation, liability, and flexibility. You should talk to an attorney about your goals for financing your business and who may be investing or partnering with you in the business to decide which structure is best for you. Keep in mind, you can change your structure from time to time as your business needs change.
HINNANT: The short answer is “in consultation with an attorney and a tax professional.” Which corporate structure your business should take is often decided on a case by case basis, and many factors go into that decision. In general, a business owner should opt for the structure that allows for the best balance of sharing or minimizing personal risk while still giving the business owner the control they need to make decisions in a timely and beneficial manner. The size of your business, number of owners, anticipated growth and your vision for what you want your company to be all factor into the decision making process. Tax implications often drive the decision-making process as well, so it makes sense to discuss your plans with both an attorney and a tax professional.
NUGENT: In my opinion, if you are asking this question the answer is probably a limited liability company. Sole proprietorships and partnerships do not limit your liability for the actions taken by your partners or employees. Corporations tend to be very heavy on formalities that get in the way of running a smaller company. However, the statute that creates the LLC anticipates that the company will be run informally without a lot of need for board meetings and shareholder meetings and the like. However, when choosing any business form, you should be aware of what the default rules are for that company. For example, absent an agreement to the contrary, each member of an LLC has an equal right to manage the company, but profits are distributed based upon initial contributions as opposed to who owns how much of the company. These default rules can be contracted around with a good operating agreement tailored to your individual needs.
EDWARDS: Perhaps this question would be better stated as: When should you not choose a limited liability company? LLCs are adaptable and, in most cases, will give business owners the most security and flexibility. To begin with, there’s no real reason to organize as a sole proprietorship or partnership any longer. Sole proprietorships and partnerships are, quite frankly, dangerous. That’s because, unlike members of limited liability companies or shareholders in corporations, a sole proprietor or general partner has unlimited liability. That means that the business’ assets and the individual owners’ assets are the same. So, when a sole proprietorship or a partnership signs a contract, or if someone falls on property owned by the individual or the partnership, the owners are on the hook. For many small businesses, an LLC will be superior to a corporation. An LLC’s profits generally receive favorable tax treatment. A corporation’s income usually is taxed twice. The corporation itself pays tax on its profits. The shareholders also pay taxes when the corporation authorizes dividends. In other words, any time the shareholders withdraw profit from the corporation that draw will be taxed at the capital gains rate. An LLC’s tax structure typically doesn’t work like that. In an LLC, the profit flows through to the owners, appearing on their personal tax returns. Though an LLC will often be superior, there are times when it might make sense to incorporate — to form a special type of corporation, called an S corporation. An S corporation’s profit flows directly to its shareholders, much as an LLC’s profit does. But unlike an LLC, an S corporation can also authorize dividends. Depending on the shareholders’ personal financial circumstances, then an S corporation may make the most sense because it may help reduce the owners’ overall tax burden.
Do I need industry-specific governing documents for my business?
EDWARDS: Generally, no. In most industries, there are no industry-specific governing documents. There are, however, governing documents — apart from your articles of incorporation or articles of organization — that you should consider. In a corporation, for example, you need bylaws to establish corporate governance, and you also should consider a shareholders’ agreement. While the articles of incorporation create the corporation, they do not establish how it will be run. That’s where the bylaws come in. The bylaws are a separate document that establishes the positions on the board of directors, the committees on the board, and other means for corporate governance. Moreover, if you’ve got multiple shareholders, you should consider a shareholders’ agreement. This agreement, a contract between shareholders, establishes the shareholders’ duties to each other. Frequently, a shareholders’ agreement will include a provision that prevents a shareholder from selling his or her shares without approval of the other shareholders. Likewise, though they are not governing documents, you also should make sure that, if your business operates in a regulated space, you have the appropriate licensure.
KINCAID: Some professional organizations who issue licenses require certain industry specific organizational documents so you will need to work with your licensing body and the Secretary of State to determine the requirements for your industry.
What are the pros and cons of using a local attorney or a “virtual” legal service?
KINCAID: With the COVID-19 outbreak, more people are realizing the efficiency of virtual technologies in every industry. Virtual does not have to mean impersonal and can often reduce legal fees and time required to complete legal tasks like contract drafting, meetings, etc. An attorney who has the ability to work remotely will be there and can help no matter the crisis. There is no substitute for in person interaction, however, so that an attorney can learn and visit your business and develop a long-standing relationship that just cannot be built virtually. The best of both worlds is a local attorney who has remote capability.
EDWARDS: Sometimes, you can’t avoid using a local attorney. For example, if you are sued, a virtual legal service won’t represent you in court. You need a local attorney to handle that. When you do have a choice between a local attorney and a virtual legal service, you’re really choosing between legal counseling and convenience. A local attorney will act as your legal counsel, something you’re unlikely to get from a virtual service. Both an attorney and virtual legal service can draft a document for you — a will, for example, or a trademark application form. But a virtual legal service won’t tell you if what you’re doing is a good idea. An attorney will. A large part of an attorney’s job is to manage expectations — to help his or her clients understand likely outcomes and to make the best decision based on that information. An attorney also may be able to help you find a better strategy. Virtual legal services allow you to pursue a legal strategy, regardless of its merit, when compared with other potential legal strategies. An attorney won’t do that. The law is not necessarily one-size-fits-all. An attorney may be able to present you with a fresh perspective, one that you would never have learned if you used only a virtual legal service. That said, there are times when a virtual legal service is superior. If you know that you need a simple document, like a generic lease or a simple will, then a virtual legal service may be better for you. Attorneys often charge by the hour, and their fees may be far more than what you will pay a virtual legal service for a simple document. The document that an attorney drafts may be more detailed, but it also may be indistinguishable in effect. Relying on a virtual legal service can get you the same result without the costs of an attorney.
NUGENT: Many legal disputes or problems have arisen from people trying to use third party services to draft their own legal documents. While there are plenty of free forms on-line that can be used in a pinch, when a dispute arises you will wish you had the version a lawyer drafted. Sometimes these services provide templates for you to plug your information into, but unless you are well versed in the pitfalls associated with drafting that document, you may not fill it out correctly. Oftentimes, the problems with such a document are not going to be apparent until much later. For example, someone trying to place their interest in a business in a trust to keep it out of probate may make the mistake of appointing themselves both trustee and sole beneficiary, thereby guaranteeing the trust fails as a matter of law. Many unnecessary disputes have arisen due to poorly worded documents. Simply referring to an investor using the wrong terms can create ambiguity that leads to costly litigation. They say, if you think you cannot afford an attorney, then you cannot afford the problem caused by not consulting one at the right time.
HINNANT: There is certainly nothing wrong with tapping the internet for information related to the issues facing your business. In fact, I often find that clients who have taken the time to educate themselves about a particular topic make my job easier because they already have a base of understanding of the concepts we need to address. On the other hand, if you are going to make decisions that significantly impact your livelihood, you need more than just the raw data the internet can provide. Lawyers are trained to be problem solvers, to think critically about their clients’ challenges in a holistic way to come to the best solution. It really is analogous to going to the doctor – I can find a lot of information about my symptoms by searching the ‘net, but when it really comes down to getting an operation, better go see the surgeon.
What thinking should go into customer and vendor contracts?
EDWARDS: Any good customer or vendor contract will make a few things clear. Two important things come to mind. First, you’ll want to identify the scope of what you’ll be doing, what you’ll be providing, or what you’re being provided. Second, you’ll want to spell out the payment terms. Clarity in the scope or payment terms can head off any debate about how the contract should be interpreted. This ensures that you are not forced into completing more work than originally agreed to. It also ensures that you will be timely paid. Recent events suggest two other things that you should consider adding to a customer or vendor contract. First, you should consider including a “force majeure” clause. A force majeure clause is one that specifies the circumstances where an “act of God” can excuse compliance with the contract. Second, where appropriate, you should consider including a provision in the contract that requires insurance. Insurance provisions are especially common in vendor contracts. Working together, these clauses can protect your business in the event of an economic downturn
NUGENT: The answer to this question depends on the type of relationship the company has with this vendor, what they are providing to them and what is being received in return. Intellectual property concerns are oftentimes present, regardless of what is being provided. When performing work for a third party and/or hiring a third party to perform work for you, a good agreement will spell out who owns any information or technology being exchanged. Well drafted agreements can eliminate disputes about joint authorship and inventorship that could derail your business plans. Many business owners do not realize that any material subject to copyright protection belongs to an independent contractor unless a specific type of written agreement is in place. Joint ownership of IP can be created accidentally. In addition, the right documents need to be in place to make sure what the company develops stays with the company. In addition, there are a plethora of other issues that any business owner should be advised on regarding vendor and supplier contracts other than payment and delivery terms, including where disputes will be resolved, how they will be resolved, what happens if one party triggers a lawsuit from a third party, and a whole host of other issues.
HINNANT: Again, this is a broad topic and the specific answer will depend on each individual business owner’s situation. Generally speaking, your lawyer will want to think through your contract with you to minimize your risk in the event something goes wrong. Your lawyer will also want the contract to provide some clear guidance on the rights of each party and the potential remedies for potential breach. This will give a business owner a solid framework for formulating a response to the situations that inevitably arise during day-to-day operations.
KINCAID: Key terms like the deliverables (scope of work), length of contract, how to terminate the contract, payment terms (milestones), and price are crucial to a good contract. This is the document that attorneys ask for if things go wrong with the business transaction and so often they don’t exist.
What do you think of non-compete agreements and what else should companies consider in employment agreements?
NUGENT: Non-compete agreements are disfavored by the courts and should be used sparingly. Whether a court enforces a non-compete agreement depends on a few factors. First, they should be used with higher level employees; using them with employees only put in trusted positions makes them seem more reasonable to the courts. On the other hand, making every single employee, contractor and intern sign one may be read as an attempt to stifle lawful competition. Second, the more limited in time and territory the agreement is, the more likely it will be enforced. Generally, it is difficult to enforce a noncompete agreement that purports to be in effect for more than about three years in our jurisdiction. If the agreement prevents competition in territory that you are not actively working in, it will likely not be enforced. However, employment agreements can be used to nail down issues that can lead to lawsuits when an employee leaves to work for a competitor. A careful consideration of what intangible assets need to be protected should be part of any employment agreement. A well-drafted employment agreement helps set expectations for both the employee and employer.
KINCAID: The enforcement of non-compete agreements is very difficult because you essentially need to sue someone to enforce them. To be enforceable, a non-compete must be reasonable as to time (length of the non-compete term), manner (the work that cannot be done), and the scope (usually in distance or number or names of competitors). North Carolina does not favor non-competes, but our courts do understand the need for companies to protect their trade secrets and other intellectual property. Non-solicitation terms in an employment contract are important. Companies should consider these in every contract to keep former employees from recruiting talent away from a company and/or soliciting their vendors and clients.
EDWARDS: Non-compete agreements have a place, and they’re rapidly becoming standard in many employment contracts. I think they’re a useful tool. But if you choose to use a non-compete, remember that the devil is in the details. While that aggressive non-compete might seem like a good idea, it also might be unenforceable. To ensure that your non-compete is valid, you’ll want to tailor the agreement to the unique circumstances of your business. If you need to enforce a non-compete agreement, courts will examine its geographic scope, as well as its duration and restrictions on employment. Generally speaking, you can’t limit a former employee from working altogether and you can’t prohibit competition indefinitely. So when you’re considering a non-compete, it’s important that you’re realistic about your employees’ job duties, your geographic footprint, and how long you want to prevent competition. Depending on the nature of your business, you also may want to consider a non-disclosure or non-solicitation agreement. These agreements are commonly seen in connection with non-compete agreements, and they are generally much easier to enforce. In a nutshell, a non-disclosure agreement prevents a former employee from discussing or disclosing your business’ confidential or proprietary information with anyone, especially a competitor. These agreements are key if you have a bright idea or a competitive edge, and you want to keep other businesses out of your space. Likewise, a non-solicitation agreement is a great way to shore up your client base or employee pool. Non-solicitation agreements generally come in two varieties. One keeps a former employee from soliciting clients for a period of time after that employee leaves your business. The other keeps former employees from soliciting away your current employees. While you can’t guarantee that no clients or employees will leave — after all, they may elect to follow a former employee voluntarily — a non-solicitation agreement keeps current customers and employees for some time.
What are common types of intellectual property and how can businesses protect it?
KINCAID: Copyrights are the most common and can be anything from your blog, to a T-shirt slogan, a logo, training materials, etc. — this is best protected by filing a copyright with the US Copyright office. You don’t need to be an attorney to do so but the rules are complicated. The source of your goods or services, like your business name and/or logo, a key product or service name and/or logo may need to be trademarked. It is important to know if you are infringing someone else’s mark before you try and register your trademark/service mark so we recommend hiring an attorney to do the mark clearance search and then file an application with the US Patent and Trademark Office. Again, you don’t need an attorney to do this, but this is such a niche area and is hotly litigated so it’s important to get it right. If you have an idea or create something novel, a patent may be needed to protect your idea or creation. It’s important to discuss your idea with an attorney before you announce your idea to the public or you could lose some or all of your rights to protect it.
EDWARDS: Common types of intellectual property — those seen in every business — include trademarks and trade secrets. You can think of a trademark as a business’ brand: a word, phrase, logo, or design that the business uses to market itself. A trade secret is a little more complicated to define. It’s any business information that is secret, and that gets its value from being secret. There’s an easy way to think about it: Coca-Cola — the stylized brand name — is a trademark. So too are the shape of Coca-Cola’s glass bottles. The formula for making Coca-Cola — that’s a trade secret. There are two ways a business can protect its trademark, but one is more useful than the other. The first, less useful way to protect a trademark is registration with the U.S. Patent and Trademark Office. Registration is typically not needed. It offers few upsides and can be both costly and time-consuming. More important is vigilance in enforcing trademark rights. In other words, when a business learns that another person is infringing its trademark, the business must take steps — sending cease and desist letters or, eventually, suing — to assert its ownership. Trademarks, whether registered or not, can be abandoned. If a business lets another infringe on its trademark for a long enough period of time, the business loses the right to enforce its mark. While protecting a trademark requires vigilant enforcement, protecting a trade secret requires more advanced planning. In North Carolina, business owners must take reasonable steps to protect their trade secrets. Most often, “reasonable steps” include requiring employees to sign a confidentiality or non-disclosure agreement, something that limits their ability to use, or even to talk about, their employer’s confidential, proprietary information outside of the workplace. Other methods involve limiting who can access confidential, proprietary information. The theory is common sense: If something is valuable to your business, you probably shouldn’t give everyone in the business access to it. At any rate, though they are the most common, trademarks and trade secrets aren’t the only type of intellectual property. There are also copyrights and patents. Unlike trademarks or trade secrets, these types of intellectual property protect creative works or ideas and inventions. If your business makes art, or if you invent something, you may want to think about copyright registration or applying for a patent.
NUGENT: Patent law can be used to prevent others from copying and selling an invention. However, patents require a lot of careful planning prior to any form of public disclosure or sales discussions. There are also several different types of patents and patent applications. Consulting with a patent attorney early, prior to discussing the invention with others, is highly recommended. Trademark law protects branding, e.g. company names, logos, and symbols from being used by competitors to benefit from another brand’s reputation. Trademark rights arise out of use, but trademark rights are very limited geographically without federal registration. Copyright law can be used to protect creative works. Copyright can help a business protect a lot of different forms of expression even those based on factual information. Ownership of copyrightable material sometimes requires a particular type of written agreement. Trade secrets can also be used to prevent valuable business information from leaving your company and landing in the hands of competitors. Trade secrets are not registered in advance and as a result, careful attention to identification of the material to be protected is almost as important as the efforts to maintain its secrecy. It is important to have an understanding of how these areas of the law function if you want to use them to protect the fruits of your labor. In the end, each of these forms of protection should be considered a tool that can be used as part of a broader strategy to capitalize on the products of your intellectual endeavors.
How should business owners address privacy laws?
KINCAID: With more information being shared online than ever before, businesses need to understand what customer information they are gathering, the storage of such information, and the usage of the information. Businesses should ensure that customer data is securely stored and for those in the medical profession all HIPAA requirements are met. If businesses use third parties to host customer data, it is vital that they understand the third parties’ security protocols and data usage agreements. Businesses should inform customers of their rights to privacy and what the business is doing to protect them. There are attorneys who specialize in this and consumer protection laws to assist businesses.
EDWARDS: Dealing with privacy laws in the United States is difficult because the country lacks a comprehensive framework. Instead, privacy laws in the US are a patchwork of state laws and regulations that are more, or less, comprehensive depending on the state. Even so, some best practices that can help a business — of any size — not only stay compliant with the relevant privacy laws but also keep its customers happy. First, it is important that you know exactly what personal data your business collects. You cannot effectively manage others’ data if you do not know that you have it. Second, once you have a handle on the information that you have, you should take steps to pare it down. Keep only what you need. If there is data that you don’t need or that serves no useful purpose, there’s no reason to assume the inherent risk of hanging on to it. Finally, when you know what you need, make sure to keep it secure. Security encompasses both physical security and electronic security. If your business stores private information on paper, you should have a system for storing — and disposing of — the information. Likewise, it is important to understand your computer system’s vulnerabilities and capabilities. There are other strategies for protecting private data. Some companies are appointing a single employee to be in charge of privacy issues. By having a single person at the head, it is easier to ensure that no potential vulnerability gets overlooked. It also may be wise to hire a third-party auditor, who can help your business identify blind spots in the way that it handles sensitive information.
What legal hazards should companies consider as more business takes place online?
HINNANT: Data and security breaches immediately come to mind. A business owner wants to be able to protect their trade secrets, financial information and, in many instances, the private information of their clients and customers.
KINCAID: Client data storage and security is probably the number one risk to businesses. Understanding the third parties involved in hosting the credit card processing, the customer relations management tool, and virus/malware protections are critical. Data breaches can occur no matter what size the businesses and I recommend reviewing your security protocols and plan at least once a year with your information technology professionals to find holes in your network or processes and correct them as you can. Strive to get better and better each time. Money spent on network and security infrastructure is never wasted and is often recouped in increased productivity.
EDWARDS: Online business raises a number of concerns. The first is preserving your clients’ or customers’ confidential or private information. If you use an online platform that asks your clients for personal information, including addresses or credit card numbers, then you’ll want to take steps to ensure that information remains secret. Other aspects of online business are less obvious, but just as hazardous. For example, if your business has a website, you should take care to avoid using copyrighted images. In addition, when your business runs a website, you also must ensure that it complies with the Children’s Online Privacy Protection Act. Among other things, that Act prohibits your website from collecting personal information from children under age 13.
How can a client get the most value from working with your firm?
KINCAID: Our firm is uniquely positioned to meet you where you are. Whether that’s an in-person meeting or via a remote web session. We have invested in technology which allows our attorneys and staff to work from anywhere and ensures we can provide services no matter what is happening at home and around the world. Our attorneys have decades of experience in their fields and really care about our clients. We value partnerships over profit and work hard to help each of our clients achieve their goals every day.
EDWARDS: Ward and Smith, P.A. puts its clients first and values teamwork. We’re a full-service law firm, so we are equipped to handle almost any problem — from business formation to estate planning to family law. Our focus on teamwork improves our problem-solving skills. Unlike many law firms, our partners are encouraged to distribute work to the most knowledgeable among us, not to hold onto it. The Firm’s strategy of pairing its clients with the best person for the job allows us to operate efficiently and helps clients achieve the best outcome.
HINNANT: Primarily by recognizing that the costs you incur in working with a lawyer, particularly in the beginning stages when your lawyer is trying to get to know you and your business, is less of a line item expense to minimize and more of an investment in your company’s future. Business owners should carefully do their due diligence before selecting a law firm just as they would before making any investment. Once the selection is made, make the most of your investment by regularly involving your lawyer in your business’s strategic decision making; investing the time now will pay dividends down the road.
NUGENT: We add value in several different ways when serving our clients. Most importantly, our firm has a deep understanding of what it means to engage in clear communication when working with others. We believe that communicating clearly, lets us be effective in all of the ways needed to provide excellent counsel. While communicating with our clients, we have found that listening to the needs of others is most important so that we have a clear understanding of their goals and can provide the best advice while moving forward.