When you were setting out to start your own business, you likely labored intensely to perfect your business plan. You researched and reached out to trusted advisors, including a lawyer to help organize your company, protect your intellectual property, and establish contracts for employees and vendors. By minimizing costs and down-the-road problems at the outset, you positioned yourself for success and now you’re ready to expand.
In the first half of 2014, 56 percent of small businesses reported growth and 70 percent forecasted this to continue to improve throughout the year. While growth presents new opportunities, it also gives rise to a host of legal issues that can derail your business.
Priori Legal has experienced rapid growth throughout the New York area, and is now expanding to San Francisco and Los Angeles to serve the West Coast community of legal professionals and entrepreneurs. With Priori's expansion, we have witnessed and worked through these legal issues first-hand. Our advice: approach growth with the same diligence as formation.
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5 Major Legal Areas you need to Consider to Grow Strategically
1. Legal Disputes
Managing disputes are an inevitable part of every business. Whether it is a minor debt collection, which small businesses’ cited as the most frequently faced legal issue, or a major lawsuit, knowing where you stand will enable you to move forward more confidently. Past or on-going legal disputes tie-up unknown sums of money, which will prevent you from allocating the necessary capital to your growth. Find a lawyer to walk you through the disputes that need resolution prior to expansion to ensure they do not hinder your growth.
In addition, if you are expanding to a new state, you may find yourself facing a legal dispute in that state, and not your home state of formation. When a business establishes a physical presence in a state or repeatedly engages in business transactions there, it needs to meet that state's qualification requirements to conduct business there. States vary on their guidelines, but often it involves completing necessary filings and paying a fee. Failing to properly qualify before conducting business can result in significant consequences, such as lateness fees and a court in that state "closing its doors" to your company—delaying or dismissing any legal action there.
By qualifying to do business in a state, you become subject to the laws of that state. Even if it is not necessary for your business to satisfy a state's qualification requirements, you may still need to prepare to face legal disputes there. Under a state's "long-arm statute," that state may have jurisdiction over your business. Find a lawyer to explain whether your business' expansion satisfies the minimum contacts to subject you to litigation outside your home state.
Finding the right people to fill openings within your growing business presents a significant challenge to small businesses. Expanding to a new location exposes you to a new talent-pool, but may mean that you need to open an additional office or allow employees to telecommute. If you are considering allowing employees to work remotely, an increasingly popular option for employers, than you should find a lawyer to create company policies. Allowing employees to work remotely raises a number of legal implications: wages and hours, overtime, confidentiality, discrimination, and tax laws for out-of-state employees. Find a lawyer and she or she can help you mitigate the legal risks and allow you to take advantage of reaching better talent with less overhead.
Once you find the talent, you must also comply with federal and state employment laws. If you are expanding to a new state or hiring more employees, you may no longer be in compliance with relevant laws. At a bare minimum, your employee contract and your employee handbook of company policies needs updating. You might also need to find a lawyer to help ascertain whether new hires are employees or contractors and to safeguard your company’s confidential information as you expand. This may include having a lawyer draft Non-Disclosure, Confidentiality, or Non-Compete Agreements.
3. Intellectual Property
Your intellectual property is at the very core of your business, so continuing to protect it as you grow is of the utmost importance. A trademark protects your business’s brand–including your logo, your name, slogan and product names. You've probably already filed a trademark for your name and logo when you first started your business, but you may need to find a lawyer to file a post-registration amendment as a result of growth.
Failing to perform your due diligence when using your intellectual property more widely or entering new geographic regions could create instances of infringement, which would impede expansion. Moreover, if your expansion is occurring simultaneously with a new product launch be sure you talk to a lawyer about filing a patent first. Finding the right lawyer will ensure protection and streamline what can be a lengthy filing process.
In anticipation of growth, your company should create contract templates for vendors, contractors, and employees to prevent lost opportunities and exposure to legal liability. This may require you to revise or draft new contracts, particularly if you’ve used a template in the past or have used a DIY service like LegalZoom or RocketLawyer, you should find a lawyer to help you edit and revise your legal documents to fit your business.
Your contracts should take into account your business’s unique qualities and intricacies. Find a lawyer who will understand your business to pinpoint potential problems your business might face. If you are expanding, discuss with a lawyer adding Choice of Law and Choice of Forum clauses to your contract templates. These clauses will allow you to foresee where the contract dispute will be brought and under what laws. This makes any future litigation on the contract more predictable and less expensive.
Although you wouldn’t avoid an opportunity for profitable growth on account of paying higher taxes, don’t underestimate the impact of taxes during expansion. If you haven't established a legal entity for your business, you should immediately find a lawyer to determine what kind of business structure would be appropriate for you. This is crucial in minimizing potential tax payments and avoiding personal liability. If you have already chosen a business entity, be wary of whether increased profitability and growth landed you in a higher tax bracket.
By expanding to a new state you must also pay state income taxes on profits earned in that state. The extent to which you need to pay taxes in a new state will depend on your chosen business entity—corporations must pay state's income tax, but LLC member may avoid double taxation. In any new state in which you expand, you must also consider the effect of that state's sales tax and employment tax requirements. Incorrect tax reporting can lead to substantial fines and penalties upon audit, but if you find a lawyer qualified in this capacity, it can help you avoid unnecessary tax liability.
Don't let potential legal costs deter you
A survey of small businesses revealed that last year 13 million small businesses had a significant legal event, but only slightly more than half sought the help of an attorney. Overwhelmingly, these small businesses cited high cost as the reason for not seeking legal advice.
If you are expanding, you will face at least one of the above legal issues. Don't let legal cost, or any other factor, prevent you from seeking legal counsel. Just as with formation, consulting a lawyer early will not only save money over the long-term, but also prevent you from taking one step forward, two steps back.