Organize Your Business Where in The State Where You Are Located

Entrepreneurs starting businesses frequently have notions about organizing their companies in distant jurisdictions. Delaware and Nevada tend to be the jurisdictions of choice for many large companies and start-up entrepreneurs sometimes follow suit.
If you are a large business with many shareholders, or maybe even a public company, there are some legal advantages management may have by organizing in one of these states. However, for most businesses, there is no discernable advantage to organizing elsewhere.
For most businesses, the effect of organizing in a state other than the one where your business is located merely increases your costs. For example, if your business is organized in Delaware as an LLC but it is operating only in New York, not only do you have to pay filing fees, franchise taxes and fees for a registered agent in Delaware, you are also required by law to file as a foreign entity in New York, which includes meeting New York’s publishing requirement (approximately $1,300 in New York County). Essentially, you’ve doubled your start up fees for no appreciable advantage.
If down the road your business grows and there is a material advantage to organizing in a different jurisdiction than your home state, you can change the businesses’ organization state inexpensively through a simple migratory merger. At that point, your business should be in a better position to absorb the extra costs.
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Employment Agreements Not Required for Employees

One of our new clients is a software company that develops trading programs for financial services firms. We were helping them negotiate a 7-figure investment from one of its clients, a major investment bank.

In becoming familiar with our new client, it seemed odd to us that every employee had an employment contract, including the receptionist. When we inquired with our client, the CEO asked, “aren’t we required to have employment agreements with all employees?”

In every job the CEO prior to founding the company, had he always employed pursuant to an employment contract. He just assumed that this was the way business was done.

While it may be advantageous to enter into employment contracts with certain executive level employees or staff with very special skills, in most cases a contract is not necessary and is probably disadvantageous to management.

New York State is an “at will” employment state. This means that employees can be hired and terminated for any reason or for no reason, and at any time, without liability to the company.

Employment contacts alter this “at will” policy, which may give employees more rights than
what was available under the “at will” doctrine. This may expose the employer to liability if the employee was terminated in breach of his or her agreement.

Even though an employment agreement is not required, in businesses where employees are creating any form of intellectual property for the company, it is imperative that the company have the employee enter into an “assignment of inventions” agreement. This is not an employment agreement, but an agreement where the employee irrevocably assigns his or her right to any intellectual property they create for the company while employed there. Without is, in most cases, the employee (not the company) owns any inventions or IP it creates while on the job.

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Steps to Take if an Employee Violates a Non-Compete Agreement

If you think a former employee has been or is about to violate the terms of an agreement not to compete, contact your company's attorney right away. Your business could suffer irreparable harm of immediate action is not taken.

Your lawyer will likely take the following measures.

1. Assess Your Goals. What are you trying to protect and what are the risks of attempting to enforce the restrictive agreement versus doing nothing. Ultimately, what are you trying to achieve and how much are you willing to spend on legal fees to accomplish your goals.

2. Send Warning Letters. Warning letters will go out to the former employee reminding them of the terms of the agreement, and to their new employer advising them of the terms of the agreement.

3. Temporary Restraining Order. Your lawyer will file an "order to show cause", and expedited court proceeding, potentially without the other party being present, seeking a temporary court order (TRO) preventing the employee and new employer from violating the terms of the agreement.

4. Preliminary Injunction. Your lawyer will file for a preliminary injunction with your local state court, which is the next step after the TRO. The employee and his or her employer will likely attend and argue on their behalf. If you win, the employee is ordered by the court to discontinue the activity that is violating the restrictive agreement until such time as you can obtain a permanent injunction.

5. Permanent Injunction/Damages. After the preliminary injunction, your lawyer can seek a permanent injunction, and seek monetary damages for violating the terms of the agreement through a trial. If you prevail, the employee and the new employer is permanently restricted from engaging in the activities that violate the non-compete, and you may be entitled to monetary damages if you seek them.

6. Settlement. During all these stages, your attorney should be trying to work out a settlement between your company, the former employee and their new employer to achieve the fastest resolution to your issue. The outcome of these disputes are uncertain and the fight is expensive. Often times, these cases are resolved prior to filing for the TRO, and almost always resolved, either by settlement or the employee quitting their new position if you can obtain a preliminary injunction.

For more information about enforcing non-compete agreements, see the September2008 issue of Furnari Scher’s e-zine, the Business Law Update at: http://www.furnarischer.com/newsletter0908.html .

Arbitration Clauses: An Insurance Policy Against Emotional Adversaries

We regularly advise our corporate clients to avoid litigation at all costs. A trial requires an immense amount of management’s time, it is a big distraction from operations, and business frequently suffers. Add in the additional cost for litigation attorneys, it’s no secret that the lawyers are often the prevailing parties.

Sometimes legal disputes are unavoidable and in these situations we advise our clients to reach a settlement as quickly as possible, even if it means walking away from some money or taking a hit to their ego. It enables management to move on to positive endeavors and, in the long run, is better for business.

Occasionally, however, you’ll have an adversary who refuses to negotiate a reasonable settlement despite the financial burden on them to continue with a lawsuit. These litigants are often very emotional about a claim, or are foolishly clinging to “principal” to make a point. Litigation attorneys love clients like this, especially if they have deep pockets to continue paying the firm’s bills. We frequently see this situation in partnership disputes where there’s been an emotional falling out between partners.

By adding arbitration clauses in all your contracts, you have an insurance policy against the emotional adversary. In an arbitration clause, both parties agree to submit any claim that cannot be settled to an arbitration panel in lieu of going to court. Courts strictly enforce contracting parties’ agreement to arbitrate claims and will hardly ever permit a claim to proceed in court where both parties have agreed to arbitrate in a contract. An arbitration panel’s decision after a hearing is then final and binding on both parties.

Unlike litigation that can drag on for years, arbitration is much less formal than a trial and takes significantly less time to reach a final resolution. In the end, litigation costs are significantly less burdensome. Some critics of arbitration claim that panels’ decisions can be unpredictable, which can be true. Further, often in contract disputes there are no clear winners or losers—the panel seeks a remedy that is most fair to both parties. Notwithstanding, for most businesses, arbitrating disputes that can’t be settled makes the most sense.

For a free copy of our Business Partners Questionnaire, a useful tool that saves business partners money by helping them begin a dialogue about their relationship, email partners@furnarischer.com.

Paying Overtime Correctly

Failure to pay overtime to certain employees is an issue that can get you entangled in expensive litigation. Under state law, employers are required to pay certain employees overtime wages of one and one-half of each employee's regular hourly wages.

There have been overtime abuse class action law suits filed against some very high profile employers recently. Here are just a few:

Home Depot. Managers-who are generally exempt from state overtime pay requirements-were asked to regularly perform the same tasks as hourly co-workers who were eligible for overtime pay. A class of 2,000 employees sued for estimated total damages of $100 million.

J.P. Morgan Chase & Co. Employees in a New York call center filed a class action for unpaid overtime wages. Plaintiffs alleged that Chase promoted employees to re-titled "management" positions, even though the employees’ job functions remained the same.

Allstate. Employees filed a class action against the home and auto insurer for allegedly refusing to pay overtime to its adjusters. It routinely assigned them so many claims that they had to work nights and weekends. Approximately 3,000 employees were eligible to receive payments.
Allstate could pay as much as $120 million to settle these unpaid overtime claims.

Similar lawsuits have been filed against RadioShack, Starbucks and Lowes.

Certain kinds of employees are exempt from the payment of overtime. For example, administrative staff, professionals and executives. However, you must have clear understanding of which employees fit within these exempt classes.

Penalties for non-compliance can be high, including paying all back wages, plus unpaid taxes and penalties, penalties up to the amount of the unpaid wages, plus your employees' attorney fees.

The US Department of Labor has an excellent FAQ covering this issue: http://www.dol.gov/compliance/guide/minwage.htm

Are you making legal mistakes that can shut your business down? Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.

Avoid Litigation at All Costs

It may seem counter-intuitive that a lawyer is telling you not to get involved in litigation. However, my job as a corporate attorney is to make sure that my clients do everything they can to minimize the risks within their control and to avoid conflicts that can land them in litigation, or worse.

In comparison to the cost of making sure your business is on solid legal footing at all times, the cost of litigation is astronomical. And I'm not just talking about cash. The drain of valuable managerial time and energy resources required during litigation is often too much for a growing company to handle.

For young companies, in most cases, winning in litigation is less often about who is right and who is wrong, but about who has the deepest pockets to engage in a protracted battle.

Sometimes litigation is unavoidable. Consider alternative means of dispute resolution, such as mediation or arbitration, and where possible, include in all of your contracts clauses for mandatory mediation or arbitration to settle disputes. Also, if a reasonable settlement offer is available, think seriously about taking it instead of spending more time in court.

Better yet, invest time and money on proper contract drafting, by competent corporate counsel, prior to any major transaction to limit your exposure to litigation down the road.

Keep in mind that, in business, it's always much less costly to make sure the basic legal foundation of your company is right from the beginning -usually by a multiple greater than 20!
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Ignorant of the Law?

As a fellow entrepreneur, I understand that we as a breed are self-sufficient go-getters. That attitude is what helps us gets through the tough start-up years. However, at times, the "I-can-do-it-myself syndrome" can get us in over our heads. With respect to legal matters, I never advocate doing it yourself. It's a sure-fire way to get you, and your business, in trouble.

That said, hiring a lawyer does not give you license to be completely ignorant about the laws that affect your business. In most businesses, you do not need to be an expert about the law to keep yourself out of trouble. You merely need to know a little bit so when you spot an issue that may land you in trouble, you can find the help you need to resolve the problem before it becomes a big one.

Generally, learning a little about the following basic areas of the law can help keep you out of legal hot water:

* Basic contractual rules
* How to protect your ideas and inventions (copyright, patent, trade secrets)
* Major employer-employee laws
* Securities laws affecting how you can raise capital for your business
* Governmental regulation of your industry, including licensing requirements.

A special note about using contracts in your business. All of your important business agreements must be in writing. Oral agreements, particularly with respect to the sale or purchase of goods valued over $500.00, are usually not enforceable and leave you with no recourse for compensation or legal action. Make sure your contracts are well thought out, drafted in your favor and give you flexibility and protection.

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Are you keeping meticulous corporate records?

Improper corporate record keeping can cause problems with the IRS, hamper your ability to raise equity capital and could result in personal liability. Yet, entrepreneurial businesses are notorious for overlooking basic corporate records. Failure to document meetings of the Board of Directors and shareholders, failure to record stock issuances and to document stock transfers, and failure to approve material corporate transactions outside the ordinary course of business are common infractions of the guidelines that protect the legal status of your corporation or LLC.

Widely-publicized cases of misuse of corporate funds have courts “piercing the corporate veil,” or disregarding the corporate entity and holding founders and shareholders personally accountable for claims directed against the company.

Keeping proper corporate records is a solid way to prove that your business is real and valid, and not just a monetary shelter for shareholders.

Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit http://www.7deadlylegalmistakes.com/ to get a copy of our free mini course.

Do you have intellectual property you need to protect?

Have you considered whether you should protect your corporate name or the name of your products or services by filing for a trademark or servicemark? Will you invest a significant amount of money promoting your business name, or service or product name, only to be prevented from using it because it infringes on another business' protected name? Are you developing products or methods for which you will need patent protection? We can help you determine if you should consider these issues, research possible infringements and help you make the filings necessary to protect your intellectual property.

Are you making legal mistakes that can shut your business down? Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com and learn how to save thousands on legal fees.

Getting into bed with someone...professionally speaking?

In the last month, we've fielded no fewer than five calls from entrepreneurs who were desperate to get out of problematic business partnerships.

Problems have ranged from partners not putting up their fair share of "sweat equity", divergent viewpoints on business direction, partners who disappeared and went incommunicado, to one instance where a minority partner was removed by the majority partners from an LLC without notice or a meeting of the members.

Thankfully, most of these issues settled amicably, but two are heading to litigation, a costly and time consuming endeavor.

A business partnership is fraught with uncertainty and risks that you might not be aware of. Have you considered what would happen to your business if a partner dies, becomes disabled, gets divorced or goes bankrupt? What if a partner wants to withdraw from the business or sells his or her equity in the business to someone you didn't want, or expect, to be partners with? What if a partner prevents you from selling your equity in the business? Have you considered who will have control over major business decisions or what may happen to your business if you and your partner have equal control and you have a stalemate on a major decision? No matter what legal form your business is in (corporation, partnership or limited liability company), business partners must have an agreement which protects the business and each partner from these uncertainties and provides a framework for how these situations may be resolved.

Are you making legal mistakes that can shut your business down? Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com and learn how to save thousands on legal fees.