The role of the business owner is always changing. Not only do many business not have an attorney or any form of a legal department, but business owners without legal assistances play the dual role or making business decisions and legal decisions. It is important that a business owner find a lawyer that can understand legal consequences, draft legal documents and conduct litigation; otherwise, the business owner is required take on the strategic management of legal risks to protect the value and assets of a company. Absent proper understanding of the issues facing business and how the issues can impact the bottom line of a business, the risks will negatively impact a business without a business owner even realizing it before its too late.
The first step is to actually understand when you are faced with a legal risk. Look for uncertainty of the outcome of a certain event. Businesses are faced with a variety of risks on a daily basis. Business look to assume the right types of risk with positive consequences, like profit or increased market share, while reducing the potential of negative consequences, like litigation or fines. While many risks can have a legal implication, that does not necessarily mean all risks are legal ones, certain types of risks are accepted as a part of business, others relate to legal matter. Despite an owner’s goal of dodging risks, the business owner still has to be able to identify them. Here are five common types of legal risks that can impact a business:
1. Corporate Level Risks
Businesses have several options when choosing a legal and governance structure for the organization which will set the tone and set a foundation for processes for organization with matters such as taxation, liability, required documentation, etc., and how management and operational decisions are to be made. A business owner must understand the pros and cons of each legal structure, and need to adopt strong corporate governance that promotes ethical business practices throughout the entire organization. Most business owners are unaware how important it is to identify the corporate risks across the whole company, such as fraud or unethical business practices, and implement controls, like audits and awareness programs, to manage these risks. Although of these corporate risks can be avoided by having the proper entity formation and corporate governance documents and entity-level organization to avoid the pitfalls associated with improper formation. It is always best practice to consult an attorney when establishing entities to aid in the protections necessary for ones business.
Another type of legal risk that a business owner will need to understand is the risk to assets. The value of both tangible assets, like buildings, and intangible assets, like human capital and intellectual property, need to be protected. To protect the rights and obligations related to the legal assets owned by a business, it is important to require a clear picture of all the company’s assets so that they can identify and manage risk to avoid negative consequences. Ensure proper protections such as copyrighting, trademarking, having proper data security software and off-site storage facilities for electronic and hard documents needing great protection.
Contract risk is often defined as the possibility of financial loss either due to a buyer reneging on the contract or a failure by the organization to adequately manage the contractual benefits or obligations. I cannot tell you how often I meet people that never used an attorney to review a contract, and instead, the individual signed the document without review and became locked into an unfavorable contract. If a business owner is doing a deal with a contract that was not provided by his/her attorney, then it is very likely the terms of that contract will be drafted in favor of the other party – not the business owner. Therefore, when looking at contract risk it’s equally important to look at the contract management process a business should have in place to fully understand the company’s risk exposure. Poor contract processes, such as not using legal assistance, not conducting research, not looking at past issues you had with your business and making edit requests, manual mistakes, non-compliant terms and/or an inability to close a contract on time, can put your company at risk. Organization of contracts internal to the business is also important. Contract management software can help standardize the contract process and empower managers to draft contract terms using templates, reducing the organization’s exposure to contract risk. Of course, having an attorney guide you through this process will go a long way to avoid pitfalls in contracting.
4. Legal Disputes
Legal disputes include any dispute in which a legal claim is made, including employee misconduct, accidents, product liability, etc. As a business owner, one of the main responsibilities is to limit the risk of disputes because they are a substantial drain on resources, can bankrupt a business, and also provide a negative reputation for a business depending on how public an issue becomes. Even if disputes don’t end in litigation, they can damage business relationships, reputations and cost your company valuable time and other resources. To reduce the risk of disputes and litigation, a business owner can take proactive steps like using risk transfer agreements, ensuring compliance, maintaining accurate records and using legal assistance from an individual lawyer or law firm that can alert you to potential dispute risks.
A regulatory risk is the risk of having your company’s license to operate withdrawn by a regulator, or having conditions applied (retrospectively or prospectively) that adversely impact the economic value of an enterprise. Having a license suspended can result in lost revenue, lost clients and reputational damage because of the restraint from being able to operate business due to regulatory penalties. A business may be subject to regulations from government institutions, commissions and/or municipal and state agencies. It’s important to understand the specific regulations that apply to your company’s activities and the related rules, such as specifications, policies, standards or laws, you must follow to avoid penalties and/or litigation. It’s also important to know when changes are made that a company is not at risk of non-compliance. Proactive regulatory risk management requires implementing specific policies, procedures and protocols to ensure that your company is in compliance well in advance of regulatory changes.
As a business owner, a very important role is to support the organization in assuming the right types of risk with positive consequences, like profit or increased market share, while reducing the potential of negative consequences, like litigation, suspended licenses, or fines. To fulfill that role, not only does a business owner need a structured way of identifying, assessing and mitigating risk but also for realizing when it may be time to access outside legal assistance and make it a part of their every day practice of risk mitigation.