One of the areas of advice that the TSBDC defers on is legal issues. That’s why I choose to surround myself with folks that can give advice in these areas. One such person is attorney, George Phillips from Bone McAllester Norton. He will be teaching a “Best Legal Advice for Small Businesses” workshop and below are some of the tips he finds important.
1. Get Personal Guarantees. If you are extending credit to a small business, always try to get a personal guaranty. When the borrower fills out the credit application for their LLC, add a line and ask them to sign that if the LLC does not pay, that they will. Most of the time when a small company is seeking credit, they will sign what is put in front of them. If they won’t, you should wonder why, and start asking for financial statements for the LLC to see if it is credit worthy.
2. Have A Partnership Agreement. If you have to have a partner, make sure there is a partnership agreement. However, given the risks of a true partnership, and given that the LLC is available as an alternative, most are done through an LLC. Either way, you need an agreement that spells out how a partner can exit, can he compete after exiting, and what happens if a partner dies or is disabled.
3. Oral Agreements Aren’t Worth the Paper They Are Written On. Many small businesses operate on a handshake, but even the most honest and good folks over time forget details or remember them differently. Even if you don’t do a formal contract, send a confirming e-mail. A writing made at the time the deal was made, especially if shared with the other side and not objected to, will always trump a person’s memory in court months or years later.
4. Worker’s Compensation Insurance. While worker’s compensation does provide some level of coverage for injured employees, it caps liability for the business unlike a normal negligence suit where the damages are unlimited and sometimes only constrained by the plaintiff’s attorney’s imagination. Even if you have less than 5 employees, workers compensation coverage makes lots of sense, even if not required.
5. Deal with Good People. A bad contract with good people will, in most cases, work itself out because everyone will do what they should to try to make it work. The best contract is the one that is signed, put on a shelf and the parties never have to read it over again. They work together to both parties’ benefit, sometimes in spite of what the contract may actually say.
The opposite is also true. No matter how good the contract, no matter how hard your attorney works on it, it is still only as good as the person or business it is with. We all, on occasion, have no choice but to deal with bad folks. With those folks, the signing of the contract is often only the beginning of the negotiation. In addition to whatever the contract provides, you have to make sure you keep the leverage and anticipate and plan for the other party not doing what they promised.
With respect to your employees, insurance agents, accountants, and attorneys use the best folks you can find. Do you really want an accountant or an attorney who is so hungry for the business, they will just tell you “yes” to whatever you want to do?
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