As the year comes to a close we’ve taken a look back at what were the most common mistakes we saw businesses make from a legal perspective. We wanted to share these with you to ensure you don’t do the same.
- Accepting handshake deals. I cannot emphasise enough the importance of properly documenting any agreement or contract. I have seen numerous circumstances where there has been a handshake deal or a verbal agreement, and when everything goes pear shaped the parties no longer agree what the terms of the deal were and end up getting involved in very expensive litigation. While not necessarily needing legal input on each and every deal or agreement that you enter into, the more details of that agreement that can be placed in a written document which is signed by the parties setting out the terms of the agreement, the better off you will be if you end up becoming involved in a dispute about that agreement a later date.
- No incorporation or the wrong legal structure. The size of your business will often dictate what legal structure you use (i.e. sole trader, partnership, company, family trust etc). However, many business owners forget that using the incorrect legal structure for their business can place them in a position where they may be personally liable for the debts of their business, and more importantly that they may be placing their personal assets at risk by making them available to creditors of the business. In the current financial environment, this issue has become more important because we see so many businesses failing, and sometimes this is not because of any fault in the business itself but arises from the domino effect of another business failing and causing financial loss to your business.
- Not protecting consumer data as well as you should. Have you considered how to protect information that you have obtained from clients or suppliers in order to comply with your obligations under the Privacy Act? A simple test is to ask yourself, what is my business policy on the release of information obtained from clients or suppliers to third parties? If your answer is we do not have one, then your business may be at risk of being sued for failing to protect your consumer data and you need to consider what steps you should take to protect this information.
- Not adhering to privacy legislation. This is the same as not protecting consumer data well enough, and something you need to keep on top of at all times. There is a host of information available on government websites letting you know what your business needs to do to comply.
Relying on generic contracts. Do you have a single contract that you use for every single transaction? Did you prepare your contract from information gleaned from various sources, including other businesses contracts and the Internet? A badly drafted contract can cost you business. I have seen examples over the years of contracts that have been put together by non-lawyers. Many of these either omit to include important provisions, or contain provisions that cannot be enforced. For example, if you enter into a contract with a company, do you ask for a personal guarantee from its directors if a line of credit is being provided? Does your contract allow you to register a security interest under the PPSA? If the answers to any of these questions are yes, then you might want to have your contract terms and conditions reviewed to ensure that actually do what you intended them to do.
- Not protecting the intellectual property or trade secrets of your business. What protective measures do you have in place to protect the intellectual property and trade secrets of your business? Is there anything in your employment contracts that prohibit your staff from stealing your valuable intellectual property and trade secrets in order to work for the opposition or to set up their own business? If there is something contained within your employment contracts, it is much easier to enforce these terms against an ex-employee.
- Having no measures to protect against staff leaving your business and taking clients with them. What happens if an employee leaves your business and proceeds to take a significant number of your clients with them to another business? This can be prevented with a properly drafted employment contract that prevents your employees from taking clients with them or for working for clients of your business for a set period of time after they leave your employment.
Not having a clear understanding of the consequences of personal guarantees. Do you ever ask yourself when you are asked to provide a personal guarantee for a debt of your business, whether you should be giving that personal guarantee or not? Do you actually read the personal guarantee to find out what the extent of your personal liability may be? It needs to be kept in mind that some personal guarantees are limited to an individual transaction but others may be unlimited due to a line of credit being extended to the business. This means that rather than being liable for an amount of say $50,000, you may be liable up to the limit of the line of credit, which could be several times this amount. It could be that you need to consider how you hold your personal resources, such as your home, motor vehicles, investment properties, etc before signing a personal guarantee. If you are what is colloquially referred to as “a woman or man of straw” then it is likely all of these assets are not held in your name and if a personal guarantee is enforced against you, then there is nothing for the creditor to take. Likewise, if you seek personal guarantees from the directors of companies, do you seek any reassurance about what assets may be held personally in those directors’ names or do you wait to see if they are women or men of straw when you seek to enforce the guarantee? I have seen many personal guarantees fail because the guarantors have no assets in their own names.
- Engaging a professional only after an issue arises. The number of clients who only come to see me once a problem arises with a contract is large. I have said many times to my clients that they could have saved themselves an absolute fortune in legal costs by coming to see me at the time when they were looking to enter into a contract and taking some advice on the issues at that time. Although it seems that potentially spending a few thousand dollars before you enter into the contract is a lot to pay, this is better than spending tens of thousands of dollars after the event when a dispute arises. I thoroughly recommend being proactive at the time when you enter into a contract and that you seek legal advice before signing.If you have a question when it comes to any of the above, or around a business mistake you’re looking to avoid, simply phone me on (08) 6244 0985 or email me at any time.