7 Legal Facts Every Small Business Owner Should Know
Running a small business means signing things. Contracts. Vendor agreements. Partnership documents. Maybe an NDA or two. If we are being realistic, plenty of business owners sign some of those documents without fully understanding every line. That is not unusual, but it can become expensive.
When attorney Adrian Bower joined Milton Quinn and Jacquelyn Clayborn on Say Less Unscripted, the conversation was not about turning business owners into legal experts. It was about knowing enough to recognize where problems can hide and when it is time to ask better questions.
Here are seven things worth knowing.
1. The Best Time To Get Legal Advice May Be Before You Need It
Many business owners wait until there is a dispute to call an attorney. A customer has not paid, a partnership has gone sideways or someone is threatening legal action. By then, the options may be more limited and the problem more expensive.
Adrian made a simple comparison during the conversation: if you think car maintenance is expensive, try neglect. The same thinking applies to business. Reviewing an agreement before signing it or making sure your company is structured correctly can be much easier than trying to fix a problem later.
That does not mean every decision needs an attorney. It means knowing which decisions carry enough risk to deserve another set of eyes. The U.S. Small Business Administration notes that even choosing a business structure can affect taxes, personal liability, paperwork and the ability to raise money.
Some decisions are worth getting right from the beginning.
2. A Contract Can Hurt You Even When Nobody Breaks It
One of the most interesting points from the episode came when Adrian explained how he approaches a contract review. He looks at how his client could be put at a disadvantage if the other party does exactly what the agreement allows them to do.
That changes the way you look at contracts. The question is not only, “what happens if they break this agreement?” It is also, “what am I giving them permission to do?”
Payment terms, termination rights, responsibilities and liability provisions can all shift risk from one party to another. Something does not have to look obviously unfair to create a problem later. Before signing, understand what you are responsible for, what the other party is required to do, how and when you will be paid, and what happens if the relationship does not go as planned.
A contract should cover more than how a business relationship begins. The details often matter most when things get complicated.
3. Forming an LLC Is Only The Beginning
Getting your LLC paperwork approved can feel like one more major startup task crossed of the list, but the responsibilities do not stop once the company exists.
Businesses have ongoing requirements, and those requirements can vary depending on where the company operates and how it is structured.
During the episode, Adrian talked about details that are easy to overlook, such as keeping required filings current and maintaining accurate registered agent information. They may seem like small administrative tasks until ignoring one creates a much larger issues.
The IRS provides guidance on federal tax responsibilities, Employer Identification Numbers and other considerations for new businesses. Its recordkeeping guidance also explains why good records matter for tracking income and expenses, preparing tax returns and supporting items reported on those returns.
Starting the company is one step. Keeping the business in good standing is part of running it.
4. Your Partnership Agreement Matters Most When You Stop Agreeing
Business partnerships usually begin with optimism. You are thinking about what you can build together, not what will happen if the two of you eventually disagree. Those are exactly the conversations worth having early.
Adrian points to question about decision making, voting power, tie breakers and what happens if the partners can no longer work together.
Who gets the final say? What happens when ownership is split evenly and neither person will budge? Can someone leave the business? What happens to their ownership if they do?
The SBA’s overview of business structures also shows how ownership, liability and control can differ depending on the structure of the business.
Planning for disagreement does not mean you expect the partnership to fail. It means you have already decided how you will handle difficult situations before emotions are involved. It is much easier to make those decisions while you still agree.
5. Have An NDA Does Not Automatically Mean You Are Protected
An NDA can look official and still leave important questions unanswered. Adrian share an example of reviewing an NDA that did not clearly define what information was actually supposed to remain confidential. That is a problem.
Businesses regularly share sensitive information with employees, vendors, potential investors and business partners. That might include pricing, customer information, processes, financial information or future plans. An agreement needs to make sense for the information and relationship it is supposed to protect.
The broader lesson goes beyond NDAs. Having a document in your files and having the right document for your business are not always the same thing.
6. Your Contracts Should Grow With Your Business
What worked when you had five customers may become a headache when you have 50. As businesses grow, they often work repeatedly with the same customers, suppliers and partners. Starting the contracting process from scratch for every new project can become inefficient.
One approach Adrian discussed is using a Master Service Agreement, or MSA, along with individual Statement of Work, or SOWs.
The MSA establishes the broader terms of the relationship. Each SOW can then spell out the specifics of a particular project, including the work being performed, pricing and deliverable.
You establish the larger relationship once, then focus on what changes from project to project. As you company grows, contracts should make doing business clearer, not create another unnecessary bottleneck.
7. Pay Attention To The Indemnity Clause
“Indemnification” is one of those words you might see in a contract, assume it is standard legal language and keep reading. It is worth slowing down for.
The Legal Information Institute at Cornell Law School defines indemnification as an agreement by one party to compensate another for certain losses or damages. In practical terms, it can help determine who pays when something goes wrong.
Adrian used construction as an example. A general contractor may require a subcontractor to indemnify the GC for certain problems caused by the subcontractor or even companies further down the subcontracting chain. However indemnity clauses are not limited to construction. They can appear in vendor agreements, service contracts, leases and other business agreements.
When you see one, ask a straightforward question: What could this agreement make my business responsible for?
You want to understand whose actions you may be responsible for, what type of claims or losses are covered, and how those obligations work with your insurance coverage.
A few lines in a contract can shift a significant amount of risk from one company to another. This is one section worth slowing down to understand.
Before You Sign, Ask One More Question
You do not need to understand every piece of legal language that comes across your desk. You should be comfortable asking questions when you do not.
What am I agreeing to? What happens if this relationship changes? What could my business be responsible for? Does this agreement still fit the company we are today?
Those questions may seem simple, but asking them before you sign can uncover things you would rather understand now than learn later.
Running a business will always involve risk. The goal is to make sure the risk you take are the ones you actually chose.
How Protected Is Your Business?
You do not have to have every answer, but you should know where your business may need a closer look. Download the free Small Business Legal Checkup for a quick review of your business foundation, contracts, partnerships, confidential information and key working relations.
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This article is for general information purposes only and does not constitute legal advice. Laws and requirements vary by jurisdiction and individual circumstances. Business owners should consult qualified legal, tax and financial professionals regarding their specific situations.