Category: Business Law

  • Form Contracts are the Beginning

    Signing a Contract by Victor1558Last weekend, I went indoor rock climbing with my friends. It’s not uncommon for me to participate in activities that require signing a liability waiver. I think most people just sign them without reading it. My friends get a kick out watching me read every word and change the terms I disagree with. I respect that these companies want to protect themselves against liability. I accept that I participate in risky activities and as such I might get hurt, but if I get hurt because of their horrific negligence, I want to be able to get them to pay for my injuries that they caused.

    The same ideas apply to businesses. A lot of businesses have form contracts that they use for providing services, creating intellectual property, and/or licensing you software or equipment.   I look as these as a jumping off point to begin negotiations.

    Whoever writes a contract write the terms that best protect their interests. If a company hires the lawyer, the lawyer writes the best provisions for their client. They may not care about your interests at all. It’s your job to read these contracts carefully and propose the terms and conditions that work best for you. Lots of things may be open for negotiation such as

    • Payment rates,
    • Whether you’re licensing, renting, or purchasing software or equipment,
    • The length of the contract,
    • Whether you can end the contract early,
    • How disputes will be settled, and
    • If their creating intellectual property for your use, who owns it.

    There are so many things that could be open to negotiation. It’s best to think of the worst-case scenarios and to protect your interests and assets if one occurs. There may be more than one way to address a potential problem; you and the other side can decide which way works best for the both of you.

    If you’re given a form contract and you don’t like a provision, change it and see what the other side says. They may accept it. (Be sure to check with your lawyer so you know how to properly change the contract, or better yet, hire a lawyer to review your contracts before you sign them.) If the other side says they can’t accept an altered contract, ask to speak with someone who can or seriously consider doing business with someone else.  You don’t want to set yourself up to be screwed down the line.

    The law generally holds you to the contracts you create, so think hard before signing your name.

    In my personal life, I’ve changed contracts and the other side has accepted the changes without question. Sometimes they’ve come back and said they can’t accept it with the changes, and that opened the discussion about what they could accept. Sometimes I have to walk away from an offer if we couldn’t make a deal and sometimes I bind myself to the original contract provisions, but I always know what risks I’m taking and I try to set myself up to be protected.

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    Ruth Carter

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  • Why You Need an Operating Agreement

    Sailor race cardboard boat in base competition by Official U.S. Navy Imagery

    If you have an LLC and your company has more than one owner, you need an operating agreement. Period.

    An operating agreement is a contract between the owners of a business that tells them how they’re going to run their business. Think of it as the owners’ rule book and prenuptial agreement. It puts everyone on the same page from the beginning in terms of what each person owns, what each person is responsible for, and how you’re going to resolve problems.

    Your operating agreement can answer important questions like:

    • If an owner wants out, how much notice does he have to give? Do the other owners have first dibs on buying his portion of the company?
    • Do owners ever have to contribute their own money to the business?
    • What do you do if an owner isn’t pulling her weight? Can she be voted out of the company?
    • How will disputes be settled? If there’s an even number of owners with equal votes on each side, what’s the tie-breaker?
    • What happens if an owner dies?

    Don’t think that you don’t have to create an operating agreement if you’re going into business with your best friend, spouse, or relative. We all know someone who has gone through a nasty divorce. The same can happen in the break up of a business if there isn’t an operating agreement that tells you how events will proceed.

    It may seem strange to think about how you’ll handle problems at the beginning of the business, but it’s the ideal time to put these provisions into place. Hopefully everyone is optimistic and thinking about the business’ best interests which will make it easier to decide the best way to handle major decisions down the road. If you put off figuring out how you’ll resolve disputes until one occurs, you’ll be fighting over how the company should resolve its problems and you’ll be fighting over the problem at hand.

    Operating agreements aren’t just about resolving problems. They give you the ability to create the company you want. Some companies may decide disputes in mediation, but you can choose to settle problems with a coin flip, a game of ping pong, or let your dog decide if that’s what you and the other owners want. You can also use your operating agreement to declare other rules like requiring everyone to bring pie to work on March 14th (Pi Day) and allowing video games as an acceptable brainstorming technique.

    You’re not required to have an operating agreement if your LLC is in Arizona, but you’re asking for trouble if you don’t. This is one of those times when it’s worth it to pay a lawyer. You will pay a lot less to have someone draft the agreement for you, than to clean up the mess that could result when you and the other owners have a major dispute and everything goes to hell.

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    Ruth Carter

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  • You’re Screwed if your Social Media Policy Violates the NLRA

    Money by 401K from Flickr

    The National Labor Relations Act (NLRA) protects private employees, in particular their rights to “to join together to improve their wages and working conditions, with or without a union,” and it’s enforced by the National Labor Relations Board (NLRB). Employees are allowed to engage in “protected concerted activities,” which includes discussions about wages and work conditions on publicly accessible social media sites.

    According to a 2010 survey, nearly 50% of small to medium size businesses don’t have a social media policy, and based on the recent report from the NLRB, I suspect many companies that have social media policies, are in violation of the NLRA. If you’re an employer, you need a social media policy, but it’s critical that it complies with the NLRA.

    So, if you fire or discipline an employee based on a social media policy that violates the NLRA, you could be in a world of hurt. Here’s what happens. The employee will file a charge against you with the NLRB. The NLRB will conduct an investigation and have a decision about the merits of the case in 7 to 12 weeks. The NLRB receives 20,000 to 30,000 charges each year.

    Here’s the good news – more than 50% of these charges are withdrawn or dismissed.
    Here’s the bad news – if the case has merit, you’re probably going to be paying a lot.

    If the NLRB decides the case has merit, there’s usually a settlement between the employer and employee – meaning you have to pay the employee for violating their rights. If you can’t come to settlement, the case is decided by an NLRB Administrative Law Judge. The judge may make you provide a remedy to your employee such as giving them backpay and reinstating them in their job.

    In 2010, 8,257 cases were decided by NLRB judges. Employers were required to pay over $86 million in backpay and fines. That’s an average of over $10,000 per case! The NLRB judges also required 1,633 employers to offer an unlawfully discharged employee reinstatement of their job – and most of them accepted!

    So what’s the worse-case scenario if your social media policy violates the NLRA?

    • You have to pay your unlawfully discharged employee over $10,000 in backpay,
    • Offer them their job back (even though you’d rather they be gone),
    • Fire the person you hired to take the unlawfully discharged person’s place if they accept,
    • Deal with the expense and hassle of an NLRB investigation, and
    • Revise your social media policy so it complies with the NLRA.

    If you want to avoid all this financial and professional heartache, make sure your company has a social media policy that’s drafted by an attorney who understands social media and who keeps up with developments from the NLRB. The cost of not doing so is too high.

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    Ruth Carter

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  • When Does A Business Exist?

    La Divina Maple Now Open by Infrogmation of New Orleans

    Last Friday I had dinner with friends. Many of them are entrepreneurs and/or have major creative side endeavors. One of my friends, Sam, was excited to share that she had created an LLC for her new business. We were all happy for her to strike out on her own. I asked her how long it took to get the approval back from the Arizona Corporation Commission.

    “Five days. I had it expedited because I didn’t want to wait,” she said.

    Then it struck me – no one tells entrepreneurs that they don’t have to wait to get their LLC approved by the Arizona Corporation Commission before they can open their doors. Unless you’ve taken a class on business formation, you don’t know that you’re are allowed to call your business an LLC and conduct business as an LLC as soon as your file the paperwork and pay the fee. My friend paid an extra $35 for expedited filing because she thought her hands were tied until she her business had been approved. I bet a lot of people make the same mistake because it’s a logical assumption.

    One of the first things I did when I opened this firm was file an application for a PLLC. It took almost six weeks to get the letter from the State saying that the Articles of Organization for my business were approved.  While I waited for my approval, I opened bank accounts, purchased software and equipment, created a website, filed my application for trade name protection, and entered into contracts as a PLLC. All of those activities were completely legitimate.  I kept a copy of my PLLC application in case anyone needed proof that I had filed it.

    So what’s the take-home lesson? For most people, you can save yourself $35, file a regular LLC application, and conduct your business as an LLC once you’ve sent in your LLC application and fee. Don’t wait for approval from the Arizona Corporation Commission to get your business up and running.

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    Ruth Carter

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