The internet is full of articles about what steps to take if you are considering starting a new business. Much of this advice has a common thread: proper planning. The success of your start-up business can often depend on how well-thought-out and comprehensive your plan is.
While sometimes the only consequence of poor planning is disorderly paperwork, poor planning can sometimes thrust new businesses into unanticipated litigation they are not yet equipped to handle or afford. Below are five common litigation threats facing new businesses that may be avoided through smart and comprehensive front-end planning.
1. IP Infringement Litigation
You do not need to be a hip, new tech startup to have intellectual property (or “IP”). In fact, IP is essential to ensuring a marketable, memorable, and valuable business, no matter what the contents of your deliverables are.
As important as it is to ensure that your business’s IP is well-protected, it is equally important to make sure that you are not infringing on another business’s IP. Before registering your business with the secretary of state of your choosing, be sure to run the potential name of your business through the business search function of the secretary of state’s office for the state in which you intend to register your business.[1] Additionally, conduct internet research on the results. Here are some example questions to ask: What do the registered entities make? What services do they provide? And do those products or services sound a lot like the products or services you intend to make or provide? If so, it may be worth considering a name change or some other way to differentiate yourself. You should also run your company’s name through the PTO’s Trademark Electronic Search System to see whether the name you are considering is already a registered trademark for a different entity, but know that even if a particular name has not been registered as a trademark with the PTO, the user of that name still has rights to use that trademark that may be senior to those of any junior users of the trademark.[2]
Conduct general research on the name you intend to use, too. Perhaps there is no other entity in the jurisdiction in which you intend to register your entity, but what about other parts of the country?
The same holds true if you are planning to use your company to apply for a patent or copyright. It is important to ensure that the idea you believe is unique and special is actually unique and special. The last thing your emerging company needs in the first year of operation is responding to a potentially costly cease and desist letter from counsel for a well-established company looking to shut down your business.
2. Owner Disputes
It is astonishing how many owner disputes happen where multi-million-dollar companies have no operating or buy-sell agreements in place. These disputes are usually highly personal by the time they reach our office, but they often start with something that a simple operating or buy-sell agreement could have solved. For example, one founder thinks the best direction for the company is to invest all of the company’s profits into new equipment, while the other founder thinks the profits should be distributed as compensation. Both paths are reasonable and have merit. Without documentation defining how to overcome these disputes, however, small disagreements like this can quickly escalate until the entire operation of the company is completely paralyzed. Additionally, having 50/50 owners seems “fair” at the beginning of the relationship to agree that you are equal owners, but it creates a multitude of issues down the road without a true majority to resolve disputes.
While it may seem unreasonable to devote time and resources to figuring out what to do in the event your brand-new business fails for reasons external to deliverables, looking to a well-thought-out agreement to determine the procedure to resolve disputes may be the difference between your company perishing at the end of an expensive lawsuit or surviving to see greatness.
3. Contract Disputes
It can be tempting as a new business owner to hit the ground running and proceed on handshake deals with entities or clients that are just as excited about your product as you are. However, breach of contract or other similar claims can easily be avoided with some forethought. Take time to determine proactively the parties with which you will need to enter into relationships in order for your business to thrive: Manufacturers? Customers? Subcontractors? Landlords? Then take time to draft and refine contracts that protect you if things do not go exactly as planned. Using counsel to help draft these contracts can insulate your business from liability altogether, or it can help limit any damages in the event liability cannot be avoided.
And for those contracts you do not draft, read them carefully while repeating the following mantra: what are the consequences if this all goes horribly wrong?
4. Employment Disputes
These issues may not be as pressing for those truly newborn startups, but for adolescent startups looking to expand, making those first hires can be a truly overwhelming endeavor. And for good reason: there is a mountain of state and federal laws and regulations that govern your relationship with your new hires, and in the age of COVID, there are extra concerns of which to be wary.[3]
Before making your first hire, consider helpful tools to define your company’s relationship with the new employee and to ensure compliance with state and local laws, including a job description, an employee handbook, and policies and procedures that correctly capture and outline the obligations that you and your employees have under the law.
For some startups, the less expensive option may be hiring independent contractors on a contract basis, but beware. Just because you label your independent contractors as such does not mean the IRS or other regulatory bodies will view them the same way. Familiarize yourself with the laws in your state and ensure that you have not crossed the line that transforms an independent contractor into an employee.
5. Regulatory Traps
Almost every business is going to be subject to some regulatory authority. Whether it be the Internal Revenue Service, the Securities and Exchange Commission, Occupational Safety and Health Administration, or the Minnesota Department of Human Rights, which are only a few examples, each of these regulatory bodies has the power to enforce the law and could take enforcement action against your business if you fail to obtain the proper licenses or register with the proper authorities.
That said, many of these regulatory agencies also have user-friendly guides on their websites that can help new businesses ensure compliance. Before beginning operations, consider what regulations may impact your company’s workflows, deliverables, and customer and employee relationships, and do some research up front. For those companies that are likely to be subject to many regulatory bodies (e.g., food, hospitality, manufacturing, or healthcare), consider consulting with an attorney to help work through potential regulatory issues and threats.
Litigation is not always avoidable, and sometimes it is the best way to protect your business assets. However, meticulous business planning can help you avoid common mistakes and ensure that your business thrives in its first few years of life.
[1] You can do this in Minnesota here.
[2] Trademark Electronic Search System
[3] Some examples: here, here, and here.
If you have questions about the above article or are interested in discussing potential risks for your new business, FMJ’s Litigation Team has successfully resolved all types of commercial cases – some simple and others complex. Please reach out to Shannon McDonough at shannon.mcdonough@fmjlaw.com or Pat Shriver at pat.shriver@fmjlaw.com.
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