Top 5 Legal Tips for Small and Medium-Sized Businesses (“SMBs”)

Every SMB owner knows that large enterprises have an easier time with administration, operations, human resources, legal, benefits, etc., because they have greater resources and staff dedicated to these categories. Most SMBs do not need regular legal guidance, which can make it more intimidating when a significant legal need does arise. That could be an unexpected lawsuit from an ex-employee, or a dispute with a vendor or customer. SMBs are also not immune to surprise audits or investigations by one of the many state or Federal regulatory agencies. On a more routine basis, SMB owners and managers may wish to have a business attorney review important contracts or consult on business expansion plans.

With that in mind, here are KLC’s Top 5 Legal Tips for SMBs

1. Always have a qualified business attorney on “Virtual Retainer”.

Few SMBs have the money or need to have a business attorney “on retainer”. Larger clients with regular needs often have a revolving retainer, whereby a fixed “deposit” is held in trust by the law firm. These funds are then applied and replenished by the client as work is performed and invoiced.

For SMBs, a good substitute for a retainer is a good relationship with a qualified business attorney. That means an attorney you know from professional experience or an arm’s length relationship. It does not mean your sister-in-law at a large law firm, or the local attorney who drafted your will or handled the purchase of your home.

There are several reasons. Your sister-in-law at a large firm is under tremendous pressure to bill hours and, if she’s a partner, also develop new clients. She knows, probably from past experience, that your “quick question” is anything but quick. She doesn’t want to be dismissive, but she also can’t take much time away from her paying clients to advise you. The reality is you can’t afford her, and every “quick” call asking for free advice is time taken away from her and her paying clients. If she’s generous and gracious, she’ll give you the best off-the-cuff advice she can. But even if she’s a top corporate partner at a prominent firm (especially if she’s partner at a top firm !), she’s still your sister-in-law, not your business attorney.

In most cases, the attorney who drafted your will or helped you purchase your home specializes in those areas. After all, that’s probably why you hired them in the first place. They may also handle business transactions, but in most cases their focus is wills and trusts/family law, or residential real estate. That means they are probably less versed in the varied legal needs of an SMB.

A seasoned business attorney for your SMB is one with broad and deep experience handling the wide range of legal matters SMBs are likely to face. Ideally, he or she also has experience with similar clients in your industry. He or she is also an attorney you have consulted with in the past and paid. That’s important because many solo and small practice attorneys are dogged by an endless stream of “free advice” seekers: mainly friends, relatives and acquaintances (and sometimes their friends, relatives and acquaintances). It’s important for you to establish a relationship that demonstrates you value your attorney’s time and advice. If you don’t want to keep a retainer at a law firm, and you don’t want to have send a $10,000 retainer up front when a sudden need arises, the only alternative is a relationship founded on mutual trust and respect.

That relationship is a “virtual retainer” which will come in handy when you need help with a complex agreement or a purchase and sale transaction that your sister-in-law doesn’t have time for, and your real estate lawyer has never handled before.

2. Don’t ignore legal problems or try to be your own DIY lawyer.

Running any business, large or small, is a constant juggling act. Between managing “brush fires”, office drama, administrative burdens, demanding customers and uncooperative employees, and the need to always market, there’s a strong temptation to kick cans down the road.

However, legal problems are a far cry from leaky faucets. They rarely get better with age, and like the old saying goes, anyone who acts as their own lawyer has a fool for a client. What may look to you like a small complaint or dispute may disguise much bigger problems just below the surface. The qualified business attorney you have on “virtual retainer” (see #1 above) is the first call you should make when even a potential legal problem arises. Like a doctor, your business attorney can often tell you whether the problem appears to be serious or not, and whether any immediate action is necessary. He or she will also tell you what steps can be taken to mitigate or solve the problem. And always remember, until you call your attorney, time is not on your side.

Just make sure before you call to collect the relevant emails and documents that relate to the issue. It is difficult for attorneys to give sound advice based only on what the client tells them. Legal advice is based on specific facts, and for attorneys, the “facts” are in contracts and other written documents, as well as emails, text messages, social media posts, and other records of your interactions with others. Also make sure that what you’re sending your attorney for review is the most up-to-date and verified information. Old, incorrect or incomplete records means bad information – and bad information means bad legal advice.

3. Take record keeping seriously.  

Legal documents have been used for thousands of years to record business and financial transactions. Today, even SMBs have to deal with tremendous paper flow, and inevitably records will be misplaced or misfiled. While email and the cloud make it more likely those records are “somewhere”, it is imperative to keep organized and updated records backed up in either hard copy or in an off-cloud drive, for three main reasons.

First, those records may be required in an audit or review of your business. Many regulatory and licensing authorities have specific record-keeping requirements. The IRS generally requires that taxpayers (both individuals and businesses) keep records related to tax returns for seven years after filing. Failure to maintain required records can result in monetary penalties and, in some cases, more severe consequences.

Second, your written agreements and records memorialize most of your rights and obligations – with your customers, your employees, your vendors, your licensing agency, the government, and others. Forgetting, or guessing, what your rights and obligations are is a poor substitute for knowing what they are because you have complete, accurate and up to date files. Missing records can also leave you at a distinct disadvantage in the event of a dispute with other parties who do have complete records of their agreements and interactions with you.

Third, complete, well-organized files will significantly reduce time and costs for your accountant, your attorney, your managers and administrators, and others you rely on for professional services. Many hours and even days can be lost when particular records can’t be found. Moreover, poor record-keeping will complicate things when the time comes to apply for a line of credit, or seek investment by new partners, or sell the business.

At a time when most documents and records are kept electronically, there is little excuse for not maintaining complete files.

4.Have a good, knowledgeable, responsive business accountant.

There are thousands of accountants in New York and New Jersey who are capable of preparing tax returns for any SMB. The best accountants are business partners who advise on tax planning and strategies to properly reduce your tax burden. To do that, your accountant must have sufficient professional experience (at least 20 years in practice) and a detailed understanding of your business. In addition, your accountant must be responsive. Does he or she respond on a timely basis to your calls, emails and text messages? Are you confident he or she understands your goals, and has the necessary knowledge to advise you properly? A growing SMB requires a proactive accountant who will help guide the business to maximize tax efficiency, and not just prepare its tax returns.

5. Know what your insurance policies do – and don’t – cover

Most business owners understand the need for basic insurance, such as a general liability policy. They also usually have some idea of the policy limits and deductibles. What some fail to appreciate is the importance of understanding their policies’ scope of coverage and exclusions. The former refers to what is actually covered, while the latter is a (usually long) list of types of losses that are excluded from coverage, even if they might seem to fall within the scope of coverage. For example, some basic property or rental policies will cover losses from theft or fire, but not accidental loss or damage. Most relevant today, there is nationwide litigation in the US over business interruption insurance and whether it covers the impact of Covid. In most cases, courts have said the answer is no, since business interruption insurance is meant to cover losses from a fire, tornado or other natural event, but not losses from government-mandated closures.

Business owners should carefully weigh not only the likelihood of a particular risk, but also the “worst case scenario” and the cost of insuring against it. A good example is employment practices insurance. As a business grows and hires more employees, the chances increase that eventually the business will find itself in a dispute with a current or former employee. Depending on the nature of the dispute, the business could face potential fines or a civil judgment, and in any case will have legal defense costs that may be considerable. Since the cost of employment practices insurance is relatively low compared with other types of insurance, every business with employees should carry it.

Another example is cybersecurity insurance. Ransomware attacks originally focused on large, wealthy companies, then migrated to targeting important supply chain businesses such as oil and gas companies. Most SMBs are not high profile enough to be a likely target, but the flip side is that every business is a potential target – and online criminals have the ability and incentive to exploit “unlocked” doors. Therefore, even SMBs should analyze the cost-risk ratio of cybersecurity insurance.

Good insurance brokers will recommend products that address not all risks, but the most significant and most probable risks each particular business is likely to face.