Top 5 Legal Mistakes New Business Owners Make

Getting the courage to take a leap into entrepreneurship is tough on its own. Believe me, as a former law firm employee turned law firm owner, I know the challenges new business owners face. But, it’s time for me to put on my lawyer hat, and give you a rundown of the top 5 legal mistakes new business owners make time and time again.  Hopefully, this list will help you avoid these pitfalls and get you moving in the right direction!

Failing to Budget for Professional Services

For many individuals, a business starts with a unique idea. Those marvelous ideas are honed, tinkered-with, and developed over late nights, early mornings, and lost weekends. For the majority of entrepreneurs, the leap from full-time job to business owner is not one taken lightly. The majority of entrepreneurs that I have worked with spend considerable time, energy, and funds before they fully commit to leaving their full-time jobs. They set aside capital for operating expenses, government fees, and office equipment.

The amount of energy and focus people are willing to dedicate to starting a legitimate business venture begs the question: why are so many entrepreneurs hesitant, or even downright against, setting aside startup capital to pay for professional fees?

Everyone knows lawyers and accountants can be expensive. But it can be even more expensive if you are stuck with fines and penalties for doing something incorrectly. One of the best pieces of advice I’ve received from a business owner friend of mine was, “work on your business, don’t work in your business.” It’s important to remember what your strengths are. Nobody is an expert at everything. It is better to hire out, contract out, or delegate out the work you know isn’t in your wheelhouse, and spend your time on your strengths.

Now, I know there are those do-it-yourself companies out there that can get your basic business structure set up, but those companies typically use boilerplate documents that don’t always contain the right provisions for your business. A well-crafted shareholder agreement or operating agreement is going to be essential down the road when you’re looking to sell your business, or solicit potential venture capital. No investor wants to give their money to a business with messy books.

Plan to set aside about $2,000-3,000 for professional services. I know that sounds expensive, but let’s be serious. A well-crafted website can set you back at least $2,000, so investing in something as crucial as your legal and financial stability will be well worth the money spent. Start vetting accountants and attorneys early on – preferably before you launch your business. Many attorneys offer consultations at no charge to you, so you can at least understand what kind of person you want to work with.

Finalizing your Brand without Knowing the Competition

I can’t stress this one enough. Your business is your brand. Consumers find you, identify you, and relate to you by the brand you choose. However, developing a brand that infringes on another already-existing brand’s rights can prove disastrous for a new business. You can be faced with litigation, damages, and ultimately have to change your business name. Imagine investing time, money, and energy in a business name and logo, only to get a cease and desist letter from an attorney saying you are infringing on their client’s trademark. Believe me, it happens more often than you think. I once helped an established local restaurant stop a fledgling restaurant in another county from using the same restaurant name.

Ultimately, the defendant restaurant wound up having to change its name. Hiring an attorney to perform a clearance search can really save your business dollars in the long run. Remember, trademark rights in the United States are not based on the first to register, but the first to use a particular mark in commerce. So, you can still infringe on another’s mark even if they do not have a federal trademark registration. An experienced trademark attorney can perform a clearance search and evaluate potential likelihood of confusion with other existing trademarks and common law marks that are in use.

Hiring without Developing HR Guidelines

Human Resource (or HR) guidelines provide a framework for how employees are expected to behave. They describe the company’s standards, objectives, and goals for all areas of employment. This includes termination, recruitment, benefits, compensation, and employee relations. HR Guidelines provide instructions on how staff should be performing their jobs and behaving. These are the policies that keep everyone on the same track, as moving parts of a machine designed to achieve a specific goal.

Without them, the parts cannot work in tandem, and you will end up with a fragmented, and ultimately broken workforce. This may seem like a dramatic way to look at things, but believe me, I’ve seen first-hand just how important proper guidelines can be in the workplace. People like to be aware of exactly what is expected of them. HR Guidelines make workers feel more confident and capable of working as part of a team. No business can survive without them.

Failing to Incorporate

The word ‘corporation’, stems from the Latin term, ‘corpus’ which means ‘body’. When a company incorporates, it evolves into a legal person in the eyes of the law. As such, it can be sued, sell and buy property, be taxed, establish contracts, and even commit crimes. Perhaps the most important aspect of a legal corporation, is that it provides protection for its owners regarding personal liability. A corporation becomes a legal entity, separate from those who created it.

Most often, I hear business owners state that they are not “quite there yet” with their business to warrant incorporating. That’s an understandable viewpoint, considering a corporation or LLC require certain annual/biannual filings, governmental fees, and added tax concerns. However, there’s that saying that goes, “dress for the job you want, not the job you have,” and I think the sentiments of that adage can apply to a business owner’s decision to incorporate. If you are running your business, and suddenly, you are “big enough” to incorporate, not only are you going to have to deal with the hassle of setting up your legal entity while also running your business, but you will need to change your bank accounts, and you will have to talk to your accountant about how transforming into a legal entity will affect your taxes for the year. Often times, while you may be worried about the cost of setting up the entity, you will benefit from its structure in the long run.

No Shareholder Agreements

Even though you’re not legally required to have a shareholder’s agreement, I can’t recommend it enough. And I’m not just talking an agreement that outlines how the profits will be shared. I believe that the most important part of a shareholder agreement is your exit strategy. Sadly, most US marriages end in divorce. A business relationship is very similar to a marriage in terms of tying yourself financially to another person. When the relationship ultimately breaks down, emotions run hot, making any kind of decision regarding the business much more difficult. In addition to an exit strategy, shareholder agreements ensure that everything remains fair and straightforward within a company. They ensure that responsibilities for shareholders and the running of the company have been properly planned. Without formal shareholder agreements, you increase the potential for conflicts arising between shareholders, leading to a disrupted and ineffectively run business.

I once witnessed the dissolution of a company where shareholder agreements weren’t implemented, due to the personal circumstances of one individual. Because there was no formal paperwork, each shareholder’s financial interest in the company was broken down and destroyed. Remember, a shareholders agreement can assist in raising finance from creditors and banks. It demonstrates the stability of a business, and shows that you are a sensible, forward-thinking business.

California Gives the Finger to AB 1252

storekeeper

On June 28, 2014, California Governor Jerry Brown signed Assembly Bill No. 2130 into law. This Bill served to repeal and add Section 113961 to the Health and Safety Code. For those of you unfamiliar with Health and Safety Code 113961, also known as AB 1252, I’m referring to that pesky law that went into effect January 1, 2014 which required food employees to wear gloves whenever touching ready-to-eat foods. That’s right folks. The infamous “rubber glove” law has been repealed. 

This law had the food and beverage industries up in arms over the requirement that latex gloves be worn whenever handling ready-to-eat food. Generally speaking, this required that any person working in food service, from bartenders to sushi chefs, were required to wear gloves when handling food that did not need to be cooked. I’m talking about everything from rice in your California Roll to mint in your mojito. And foodservice folks were not happy about it. As soon as the law went into effect, the California legislature announced it would be extending a six month grace period before handing out citations for violations of the law. During that time, various petitions were launched to repeal AB 1252, including a change.org petition to exempt bartenders from the law.  

One of the biggest complaints regarding AB 1252, was that there was really no hard evidence to support that wearing gloves helped prevent foodborne illness in restaurant/bar patrons. In fact, wearing gloves may actually contribute to foodborne illness, since gloves are not always changed frequently enough, and the moist environment is a perfect breeding ground for bacteria to flourish. Moreover, business owners were concerned about the potential costs and environmental impact of the new single-use rubber glove requirement. In one article, San Diego owner of Polite Provisions, Eric Castro, called the law “an environmental nightmare.”

In response to the public outcry, California Assembly Members Pan and Gatto introduced Assembly Bill 2130. It was a race against the clock to get the bill passed, since the six month grace period only extended until June 30, 2014. After that, California businesses would be stuck with the glove law. Luckily, AB 2130 passed in the Assembly on May 8, 2014, and approved by the Governor on June 28, 2014. Due to the urgency of the nature of the bill, the statute went into effect immediately upon signing.

Now, rather than requiring food industry workers to wear gloves when handling ready-to-eat foods, or assembling foods, the newly enacted Health and Safety Code Section 113961 requires the worker “minimize bare hand and arm contact with nonprepackaged food that is in a ready to eat form.” While the law does require that food workers, “use utensils, including scoops, forks, tongs, paper wrappers, gloves, or other implements to assemble ready-to-eat food or to place ready-to-eat food on tableware or in other containers,” they are allowed to assemble or place ready-to-eat food on tableware or in other containers without utensils or implements, so long as they wash their hands in accordance with Health and Safety Code Section 113953.3.

Although, there is some ambiguity in the new Section as written relating to what constitutes “minimized” contact, this law is much more preferential than the previous law that required all workers wear gloves when handling ready-to-eat foods. If the California Legislature is really worried about foodborne illness in bars and restaurants, they should be focusing their efforts on proper food handling training and certifications, rather than slapping rubber gloves on everyone. At least our bartenders and sushi chefs can rest easier knowing they won’t be dusting our drinks and rolls with latex glove powder.

Chew on This: Coalition Pushing for Healthier, Low-Cost Food Options

I, for one, am very excited about this prospect. 

SACRAMENTO — A coalition of organic farmers, nutritionists and environmental justice activists is jumping into the rough-and-tumble politics at California’s Capitol.

The California Food Policy Council, a network of 19 groups around the state, wants to persuade legislators to pass laws that would support sustainable agriculture and safeguard soil and water quality for large and small farmers. The idea, organizers say, is to make healthful, affordable food options available for low-income urban dwellers, schoolchildren and others.

“It’s a confluence of many different elements of what you could call the food movement,” said Michael R. Dimock, the president of an Oakland group, Roots of Change, that provides staffing and funding for the new organization.

Combating climate change is high on the agenda, he said. “If the climate goes crazy, it’s going to impact food production.”

The council, in a report, already is touting some successes, including the passage last year of bills that expanded access to fresh produce for food-stamp recipients, gave property owners a tax break for urban farms and gardens and cleared the way for driver’s licenses for immigrant farmworkers.

The coalition is also reaching out to the powerful agricultural industry, he said. “It’s not our goal to make Big Ag the enemy.”

via New coalition pushing for more healthful, low-cost food options – latimes.com.

Box Out the Noise

I seem to see new CrossFit gyms, or “boxes,” popping up left and right. For those unfamiliar with the CrossFit box’s “ideal” business locale, most  owners look to take up residence in commercial spaces, typically located in industrial parks. One reason these types of spaces draw box owners, is the fact a landlord may be more lenient with respect to noise in an area designed for industrial activity. All you CrossFitters out there know that we’re constantly dropping weights, and there can be a lot of noise and reverberations as a result (no, your grunting really isn’t that loud). While landlord leniency may — in theory — be generally true, it does not necessarily shield box owners from receiving noise and vibration complaints from neighboring businesses.

 

Typically, these issues don’t start out as issues for new box owners. But as membership size and attendance increase, owners can start to rub their neighbors the wrong way (especially if you and your members start chewing into the available parking — a topic for another day). So, what is a box owner to do when hit with neighbor complaints?

1. Look to the Lease:

There are many differences between commercial leases and residential leases. In California, many landlords choose to use “CAR” (California Association of Realtors) forms as either a template for the commercial lease, or the entire lease. However, commercial leases can be — and often are — custom documents drafted by the landlord’s representative. More often than not, these documents can be lengthy and include a variety of provisions relating to the lease terms itself and acceptable and unacceptable uses of the property. So, if you’re talking about opening a CrossFit box (or any fitness facility, for that matter), you want to be sure the lease contemplates your intended use — i.e. you want the lease to acknowledge that you’re using the property for what you discussed with the landlord. Even better, would be a provision acknowledging that loud noises are part and parcel to the operation of a CrossFit box. If the lease does not state how you plan on using the facility, there’s a higher chance you’ll be up s**t creek if and/or when complaints come down the pike from neighbors.

2. My Lease is Already Locked and Loaded:

If you’ve already signed a lease and your lease states you’re using the location as a CrossFit box, and noise is part of the deal (I won’t go into what happens if your lease doesn’t have these things), then generally speaking, a landlord can’t just kick you out (without going through a particular legal process, called an “unlawful detainer” action). Assuming you’re not violating any other provisions in the lease, the best way to resolve noise complaints is to discuss the situation with your landlord. If the landlord knew you’d be using his/her space as a CrossFit facility, knew that you and your members would be dropping weights, and knew that it would be generally loud during your hours of operation, then you can (and should) request the landlord remediate the situation. One such way box owners can remediate noise issues is to request beefed-up soundproofing in the facility. Often, a landlord will pay for some (or maybe all) of these costs, so you should discuss this with your landlord before doing it yourself.

3. Thinking “Outside the Box” for Your Location:

One situation I’m noticing more, are boxes that operate outside of industrial spaces. Urban areas that are densely populated do not often have a plethora of industrial parks to choose from. Box owners are often forced to get creative, which can lead to major issues. One such CrossFit box, CrossFit NYC, opened on Columbus Avenue on the Upper West Side of New York, on the basement level of a 31 story condominium building. The 12,000 sq ft establishment had sold over 350 memberships prior to opening its doors, planned on offering 800-1,000 memberships, and boasted over 500 classes per week. Unfortunately for that box, they did not get the proper permits from the city’s Board of Standards and Appeals (BSA) to run the box. At the time they opened, their application had been submitted — but not approved. The box opened without the permit, and a multitude of noise complaints ensued. An attorney was brought into the mix (dun, dun, DUN!), and 150 out of 167 residents signed and notarized an opposition to the permit pending before the BSA. The Board voted unanimously to rescind the box’s permit.

In that box’s case, it looks like a case of putting the plate before the barbell (see what I did there?). You always want to be sure your permits are squared away before operating your business, but this is just one example of noise complaints gone terribly awry.

At the end of the day, I always recommend box owners and those intending to open a box, consult with legal counsel to ensure their commercial leases are in order. It’s always easier to negotiate a lease before it’s signed.