The Business Legal Health Checklist
THE BUSINESS LEGAL HEALTH CHECKLIST™
Take a few minutes and check up on the legal health of your business / organization. An ounce of prevention at this time might be worth that proverbial “pound of cure” at a later date! Simply read the following questions and make a note of anything that suggests there might be a potential problem with the organization of your business:
I. IS YOUR BUSINESS ORGANIZED TO AVOID PERSONAL LIABILITIES AND / OR LEGAL EXPOSURE?
A. Entity: Should your business be operated as a Corporation or Limited Liability Company (LLC)?
EXPLANATION: You should consider if any of the following advantages of conducting business under the corporate or LLC structure might be important to your business:
1. Entities can be used to avoid personal liability (for example, a principal owner’s home equity) for debts and liabilities of the business entity.
2. Unlike a sole proprietorship or a partnership, a corporation’s life span is usually perpetual, even when there is only one shareholder allowing long term planning for the conduct of the business uninterrupted by death or illness.
3. Bylaws of an entity constitute a traditional method of defining the management (decision making) and ownership among the principal owners of the business.
B. Partnership Agreement: Is your business operated as a “Partnership” without a current partnership agreement which provides for:
1. The percentage of ownership by the respective partners?
2. How and when “draws” may be made by the partners?
3. How and when profit or loss will be determined?
4. A structured system of management and control of the business (decision making) and specifying what actions will require majority consent?
5. Under what terms will property be loaned to the partnership and what compensation will be paid?
6. Trade secret protection or ownership of trade name & proprietary interests (especially upon dissolution)?
7. Prohibiting partners from competing outside activities?
8. Prohibiting partners from transferring their partnership interests?
9. The terms of admission of new partners and what will happen upon a partner’s death, disability, or voluntary withdrawal?
10. How a dissolution would be handled and specifying the rights and responsibilities of the partners?
II. ARE YOU RISKING PERSONAL LIABILITY?
Although one of the advantages of a Corporation or LLC is to protect you from “personal liability” for the debts of the “entity,” pursuant to the “alter ego” doctrine, major shareholders and officers of a corporation may still be made personally liable if the entity fails to adhere to “corporate formalities.” Historically, the courts have used a number of factors to support their ability to “pierce the corporate veil” (i.e., to disregard the entity to create personal liability for the owners) including, a corporation’s:
A. Failure to issue stock.
B. Failure to maintain minutes and adequate corporate records.
C. Failure to maintain arm’s length relationships (read appropriate contracts) among the related parties.
D. Treatment of the Corporation’s assets as if they were owned by an individual for his or her own benefit. See Associated Vendors, Inc. v. Oakland Meats Co. (1962) 210 Cal. App. 2d 825, 838-840.
EXPLANATION: One must conduct one’s corporate affairs properly or lose the advantages given to the owners by law.
III. ARE YOUR CORPORATE OR PARTNERSHIP FORMALITIES CURRENT?
A. Current Formalities. Are there current annual corporate minutes for every year of operation or is the partnership agreement out of date?
1. Has the corporation / partnership changed in a significant manner that affects the owners’ rights and responsibilities?
2. Has the business procured new management (officers, directors or partners) without the appropriate contracts and minutes?
3. Have any major transactions occurred without the required approval of those who make the ultimate decisions?
4. Have the goals of the business changed?
B. Interests Defined. Have new owners / investors acquired an interest in the business without contracts or shares representing their interests and the rules governing their ownership rights?
IV. ARE YOUR BUSINESS OPERATIONS CURRENT?
A. Contracts. Has the corporation / partnership entered into any significant agreements without a proper written contract? (Beware: see the “Contracts Primer” herein)
B. Contributions. Has anyone contributed money / services / assets to the business without a written agreement?
V. ARE YOUR EMPLOYMENT CONTRACTS CURRENT?
A. Employment Contracts. Are all major owners (officers, directors, shareholder, partners) and management personnel under comprehensive employment contracts? Has your business retained independent contractors or key employees without a written contract?
B. Personnel Policies. Does your company have personnel policies to control entry and exit procedures and limit liability.
C. Trade Secrets. Does your business protect its trade secrets from departing employees? (See “Intellectual Property” herein)
VI. ARE YOUR CONTRACTS COMPLETE?
A. Have you had your contracts reviewed to insure that they provide appropriate safeguards and protection from litigation and provide disincentives to deter litigious persons from starting litigation?
B. Do your contracts provide appropriate remedies for your particular situation?
C. Do your contracts provide a “home court” advantage (i.e., the parties are required to come to your local jurisdiction rather than have you travel to their jurisdiction)?
D. Do your contracts provide that “attorney fees” and “costs” will be paid by the loser?
VII. GENERAL ISSUES
A. Does your business need a “fictitious business name” filing in its counties of operation?
B. Does your business need any licenses to operate in the territory in which it currently conducts active operations?
C. Have you complied with all state county city requirements for your business?
D. Will your business enter into or renew a lease soon without having the terms reviewed?
E. Will you be doing any business internationally?
F. Will you be doing business over the internet and have you made provisions for security of your files and transactions?