Summer Success Series: Mitigating Legal Risk
Protect Yourself and Your Business from Legal Risk
We’ve asked Justin Agans, of Spengler Agans Bradley, PLLC to lend his expert advice on mitigating your legal risk with business formation.. Justin is our attorney here at Supportedly and his help has been invaluable over the years.
The very first step anyone interested in starting and growing a business should take is forming your company, which means filing organizational paperwork with your Secretary of State. Now, our Summer Success to-do items are promised to take only 30 minutes. So, to help save time, we’re including helpful links so you can read more about business formation. These links are all specific to North Carolina, so if you’re outside of NC, you’ll need to do a quick Google search for an equivalent website.
Click here for more information about the various types of legal structures.
Likely, if you’re reading this, you’ve already filed your organizational paperwork with SoS. However, if you have a business that’s earning income and you haven’t filed, you have extra credit, my friend! Check out this website for more information about registering your business with the state and follow the links to register.
Why is it important to file for your business with the state of North Carolina (or your the state in which your business will be located if you’re reading this outside of NC)?
Successfully submitting the creation filing for your business with the state of North Carolina is what officially gives you limited liability protection. That is, only after the state has accepted your creation filing is your business a distinct entity from you as an individual. This is important to protect your personal assets in the event that your business is involved with litigation in the future or the business doesn’t work out for any variety of reasons.
When is it a good time to file with the state?
Once your business is actively selling products or services or is developing intellectual property – whether that is as a graphic designer, selling your app for $.99 on the app store, or any one of infinite entrepreneurial possibilities – it’s a good time to file with the state.
Once you’ve obtained your Articles of Organization from the state and they’ve accepted your business, you’ll be able to register for an EIN number online.
Why is it important to obtain an EIN?
Obtaining an EIN is necessary to open a business bank account and file taxes. Both of these are critical to operating your business as a distinct entity from your personal life. Some examples of when that EIN will be used would include identifying your business on loan applications if you later want to open a line of credit or obtain a loan from the SBA or a local bank.
Finally, once you have this information, you’ll be able to open a business banking account that will separate your personal spending from your business spending, as well as allow you to more easily account for your revenue vs. other incoming funds. Your CPA will thank you, and maybe even require you to have a business bank account.
Why is it important to obtain a business bank account?
Having a business bank account helps keep your business vs. personal finances more organized. Having that separation will also help you comply with legal and tax requirements of operating a business with limited liability. For example, one way people lose the limited liability protection you get from filing and maintain your business with the state is by impermissibly using business funds for personal purposes.
Before we get to what I hope is super easy homework for you (Remember that feeling you got when you accidentally worked ahead in your workbook? That’s what we’re hoping for today.), I asked Justin when you should consider seeking professional help with your formation and financial questions.
If you’re unsure where to begin, the Secretary of State’s website has improved over time and has a multitude of resources (e.g., https://www.sosnc.gov/Guides/launching_a_business). Each filing also has instructions that accompany the form, and the document examiners who work with business registration are also helpful if you’d like to speak to someone in real time if you’re unsure about what filing is appropriate. If you still have trouble after exhausting the free resources with the state or local startup resources, then it may be time to reach out to an attorney or call a CPA.
Here it is! The big to-do:
- If you don’t have your Articles of Organization, EIN, and business banking set up (and assuming you’re ready for all of that), spend 5 minutes adding time blocks to your calendar to allow for it. Spend the rest of your 25 minutes checking out the links I’ve included in this email and find out if you have any questions you’ll need an attorney like Justin or a CPA to answer.
- If you have all of the above — your Articles, EIN, and your banking account — take 30 minutes to review and make sure have all of this well in hand:
- Quarterly reports that are up-to-date and with the state
- Business expenses that are separate from your personal expenses
- NEED SOMETHING ELSE HERE – what else should an entrepreneur double check right now?
- Finding any red flags? Make sure you block the time right now to resolve those issues if you can’t take care of it today.
Make Sure You Own Your Company Logo
Did you know that in the state of North Carolina (if you live elsewhere, I strongly recommend you check on this!), assignment of IP defaults to the creator unless otherwise specified in an agreement?
Plainly stated, if you contract with an individual to create your logo or photograph your team and office for the website, you need to state in your contract that you own all the work created for that project.
If ownership of work isn’t stated, you could find yourself in a bit of a pickle.
I asked Justin to expand on this just a bit for us so we’re all clear
If you hire a contractor to perform creative work for you, it may surprise you to learn that they usually will retain ownership over the intellectual property created unless a contract specifies otherwise. In this scenario, despite paying for the work, you may merely have a license to use that creative work for a specific purpose.
For employees, if they perform creative work within the scope of employment, then your company likely owns the intellectual property. However, language in the employment agreement can ensure that your business owns the creative works produced by your employees, whether part-time or full-time.
The easiest way to accomplish this is to have clear “work for hire” language in the agreement for both employees and contractors who work for your business. It is always better to have clarity on ownership of intellectual property, given its importance to your business and brand.
General examples of intellectual property include company logos, photographs commissioned from a professional photographer, SEO for your website, or a sales and marketing strategy. Specific examples include Coca-cola’s secret recipe and Google’s search engine algorithm.
We’re not going to leave you in the lurch, Justin has given us some very handy language that we can all incorporate into our agreements with employees and contractors.
Before we dive into our homework, I’d like to also consider if we can use language in our agreements that specify how a creator can use their work to help build their portfolio. We were all starting out once and unless you have a really good reason not to allow someone to include their designs or examples of the creative work, make sure you’ve included language that allows portfolio usage of the creative in a way that makes you comfortable.
Here’s our to-do list:
- Take your list of employees and contractors and consider what agreements you have in place.
- If necessary, star those team members that need to have agreements updated.
- This is where that whole legal advise disclaimer comes into play. We can’t tell you the best method of updating those agreements, you might need to execute brand new agreements or an addendum could suffice, but we have provided some suggested language that you can use as a guide.
Example: Contractor expressly acknowledges and agrees that any all proprietary materials prepared by the Contractor under this Agreement shall be considered “works for hire” and the exclusive property of the Company unless otherwise specified. These items shall include, but shall not be limited to, any and all deliverables resulting from the Contractor’s Services or contemplated by this Agreement, all tangible results and proceeds of the Services, works in progress, records, diagrams, notes, drawings, specifications, documents, designs, improvements, inventions, discoveries, developments, trademarks, trade secrets, customer lists, databases, software, programs, applications, and solutions conceived, made, or discovered by the Contractor, solely or in collaboration with others, during the Term of this Agreement relating in any manner to the Contractor’s Services.
- Update your standard employment contracts to reflect this new language so it’s baked in moving forward.
If you have multiple employee/freelancer contracts you need to update, that might take longer than 30 minutes, but identifying those contracts that need updating shouldn’t. Take the time you need to get that language updated to something you feel comfortable with and set a deadline for yourself to have all contracts updated so it doesn’t get lost in the shuffle.
Make Sure Your Client Customer Agreement Is Clear
Justin Agans, our startup attorney here at Supportedly and partner at Spengler Agans Bradley PLLC and I chatted about some of the common pitfalls he’s seen with client/customer agreements and a couple rose to the surface.
First, defining your service or product. You want to make sure this is narrowly defined, leaving how much time you spend, when you will spend that time, and the total expected output unclear can open you up for issues. In other words, define your service in terms of outcomes rather than inputs.
Here’s an example:
Jon owns a consultancy and his contract essentially states:
I’ll train your staff to make the best macarons they’ve ever had along with a few fillings they can use to ‘switch it up.’
This lack of clarity and, frankly, over-promising is going to get Jon into trouble.
The best we’ve ever had, huh? We’ll I’ll see you here every week from now until forever, Jon, because I am very bad at baking.
A better way to communicate the intended service is:
I am going to train your staff for 3 hours/wk for 4 weeks, providing hands on practice making macarons. Your team will have the opportunity during the 3 hours to bake one batch of macarons. I will bring a new filling recipe each week for a total of 4 fillings.
This super clear, very well defined service ensures that your client knows exactly what your engagement looks like. And hey, if Jon’s work does result in the best macarons we’ve ever tasted, way better to over deliver than under promise, right?
That’s the first pitfall. The second is much faster to walk through – clearly define your compensation.
Not just how much you’re expecting to get paid for your work, but also when you invoice and when you expected to get paid.
If you don’t define this, assume that your client will think they have 30 days to pay. That might not be ideal for your cash flow. Keep that in mind when writing your client agreements/contracts as well.
For example, many agreements just say something like: “Client agrees to pay Company $2,000/month for the services detailed above,” with no additional detail. A simple section like that leaves many details unclear. Is payment due in advance of services, on the 1st of each month? Or do you invoice at the beginning of each month for the services you provided the previous month? Do you have to send the client an invoice to trigger the payment obligation? When do you send the invoice? How long from the date they receive the invoice does the client have to pay you?
The bottom line is, don’t leave room for any ambiguity in your agreements. Clearly defining your services and answering the above questions in the compensation section will go a long way to drafting a clear contract for your clients. First and foremost, you don’t want to leave yourself open to the legal risk created by ambiguity in your contracts. Additionally, your clients will be happier with the clarity!
You’ve probably guessed today’s homework by now. That’s right, we’re going to look over our client agreement/contract templates and make sure they’re clear. Do you have existing agreements that are unclear? Make sure you set your deadline to clarify them, just like we did with email two this week for clarifying our employee contracts. Again, pesky legal disclaimers don’t allow us to give you specific advice so if any needed adjustments are particularly complex, reach out to your attorney for some advice.
Don’t have an attorney? Well, may we suggest…https://www.sab.law/…wink.
Thanks, again to Justin Agans for all his help and guidance. As always, I’ve enjoyed working with you and appreciate how willing you are to dive in and help entrepreneurs and small business owners!
This blog is for informational and educational purposes only. Nothing in this blog is intended to, nor does it, create an attorney-client relationship. It is NOT legal advice.