How Business Structures Work
Lawyers also begin their practice with entities known as sole proprietorships, partnerships, corporations, limited liability companies and professional limited liability companies. In addition, they may form partnerships with other lawyers. Furthermore, lawyers are required to maintain IOLTA accounts which are similar to general partnerships.
The sole proprietorship is the simplest form of business organization. It is a business which is owned by one person who has not formed a corporation, LLC or partnership under state law. It is easy to start and maintain a sole proprietorship because no formal implementation is necessary. However, a sole proprietorship may not be the best choice for a lawyer wishing to limit personal liability.
Over the years, sole practitioners have discovered that they can benefit from entering into a partnership with another lawyer. The partnership allows them to share expenses, divide the labor and provide backup for one another. The law assumes that when two or more active and co-equal lawyers serve as partners in a law firm, they are sharing equally in the practice of law, whether or not they are actually doing so. In fact, partnerships are presumed to exist if two or more lawyers maintain a common office, share a phone number, use the same stationery and bank accounts, and so forth . Thus, a presumed partnership may exist whether or not the lawyers intend to form one, and therefore, it is advisable for lawyers to enter into a written partnership agreement. The partnership ordinarily includes provisions for the allocation of income, loss, hours worked, duties, expenses, liabilities and responsibilities. It may also include provisions relating to buyout, withdrawal, resignation, retirement, dissociation and dissolution. To the extent that the partnership agreement is silent, it may be governed by state law.
If a lawyer wishes to insulate his personal assets from the liabilities and debts of the organization, he may choose to create an LLC. In California and many other states, LLCs are taxed as partnerships but are not limited to the substantive laws which apply to partnerships. LLCs may be used in situations where it would be imprudent to continue to operate a partnership.
Lawyers may also wish to operate as corporations or limited liability companies. Limited liability for corporate debts is not absolute, however. If the lawyer is found to have abused, disregarded or used the corporate duties for improper purposes, this may give rise to "piercing the corporate veil" and exposing the lawyer to the liability of a sole practitioner.
Money Matters for Legal Counsel
One of the keys to understanding your clients and their needs is understanding the language they speak every day: the language of business, finance, accounting and economics. Does this mean that you need to be able to do a discounted cash flow analysis in your spare time? Of course not. But understanding the basics of what goes into that kind of analysis and what it means for your client can help you analyze and apply both the law and your common intuitive sense to your legal advice. Because lawyers often make decisions or recommendations based on the possibility of paying out damages or a counterclaim, knowing how much that claim is potentially worth and how likely it is to be successful can help your clients make better choices about settling cases or investing additional resources into them.
Understanding the basic language of finance and accounting, including concepts of the time value of money, discounted cash flows and the relationship between net income and cash flows can turn you into a more effective problem solver and legal advisor for your clients. It is hard to make an educated decision about spending money if you don’t know how much cash you have or how much you get every month or how long it takes you to earn enough to buy something. Every time you sit down with a potential legal issue, it can pay to ask yourself whether the position your client is asking about could affect the company’s cash or net income and how long it would take them to recover from the impact, even if no payment is made now. If your client may have a 6 week cash flow problem caused by something as simple as the time it will take to respond to the issue, all of a sudden letting the issue sit for that period begins to look relatively expensive to them.
Understanding Business Contracts
Businesses enter into contracts every day. Although many are "off the shelf," existing templates that are frequently used by companies, many contracts do not have standard forms. Lawyers should understand the major components of business contracts and how to help shape an agreement.
A good contract starts with a fundamental understanding of the key commercial objectives sought by the parties. This should be the principal focus of a lawyer who is asked to integrate terms in a contract to best balance the constituencies that will be affected by the obligations to be undertaken by the business. Lawyers need to appreciate the exposure that will exist and execute a contract to protect their clients to the best extent possible.
For nearly all contracts, the parties to the agreement must be considered: the company with whom the business is contracting, its employees, other parties with whom the business works, and its own customers. For example, the company executing a lease should protect itself from liability emanating from the premises and be sure that the lease complies with applicable zoning regulations. Similarly, a company entering into a distribution agreement should make certain that it maintains pricing control, supply control, and an "out" should another supplier appear on the scene.
When drafting contracts, lawyers should be mindful of issues related to performance. Is something going to be produced? If so, what? When and how is it going to be delivered? What if it is defective? These are all issues that need to be dealt with to avoid costly "opportunity loss" and consequent damage claims.
Contracts are also designed to deal with disputes between the parties. Whether it is a Zoning Board or a buyer and seller, each party needs to concern itself with dispute resolutions. Should there be an arbitration clause? Should litigation be resolved in a certain forum? Who shall bear the costs of the arbitration/litigation? Are there provisions for injunctive relief in the event of a breach of the contract? These are just a few types of issues that lawyers should consider when negotiating and drafting contracts.
Finally, lawyers should be sure that agreements comply with all laws and regulations by which their client is bound. Non-compete agreements need to be reviewed with both general and industry-specific laws in mind. Consumer protection laws should be checked to avoid invalidating contracts. Contracts that implicate exporting controls may require a license before the transaction can be effectuated. Failure to comply with any regulations can lead to liability claims that shall be borne solely by the unwitting business if it relied solely on inappropriate counsel.
Basics of Corporate Governance
Corporate governance refers to the systems and principles that determine how stakeholders interact with the board of directors and management of a corporation. Corporate governance practices can be both prescriptive (ex. provisions in a company’s bylaws) and advisory (ex. "guidelines" issued by the Commission on Corporate Governance of the Council of Institutional Investors).
Some important elements of corporate governance include board structure, early-stage versus pre-IPO matters, publicly-held versus closely-held companies, shareholder rights, and corporate documentation. Board Composition and Role of the Shareholders Unless the articles of incorporation contain provisions to the contrary, Alaska corporations are governed by a board of directors that is elected by the shareholders. While there are generally no Alaska statutes which set forth qualifications for board members, in publicly-held companies, independent directors must meet certain requirements under applicable federal securities laws. The board of a corporation may exercise all powers of the corporation that are not specifically reserved to the shareholders. In general, the powers reserved to the shareholders with respect to election of directors, issuance and transfer of shares, and any other specific matters set forth in the articles.
Shareholder Rights Although the specific rights of shareholders are set forth in AS 10.06, generally speaking, the rights of shareholders depend on the classification of shares. Both common and preferred stock may be defined in the articles, bylaws or any certificate created under AS 10.06. All shareholders have the following rights: preemptive rights, rights to receive dividends, voting rights, appraisal rights, and rights to request information. Directors have the authority to set the dividend schedule unless otherwise provided in the articles of incorporation. The board must approve dividends. Corporate Record Keeping While corporate bylaws are not required to be filed with the Division of Corporations, Business, and Professional Licensing at the Department of Commerce, Community and Economic Development, careful and complete drafting of the bylaws is essential to sound corporate governance. Because the bylaws are adopted by the board of directors, rather than the shareholders, the approval process is inherently less formal than the statutory process used to amend the articles.
Risks and Compliance
Business leaders are keenly aware that risk is a certainty when it comes to operating a successful business. What is not guaranteed, however, is the nature and extent of that risk. In a corporate world, risk has a very precise, technical meaning. It means the chance or probability of loss, financial or otherwise. As a result, prudent business operators, at all levels, understand the risk created by transaction cost and actually embrace it. Using risk as a positive influence to help guide their business decisions and risk tolerance levels, business leaders regularly analyze their operations and, in particular, determine how to best mitigate, if not counteract, their transaction cost risk. Lawyers and all other professionals involved in the matter are highly aware of this as well.
Risk mitigation strategies vary. Some of the more widely used techniques include:
Risk Transfer
Risk Transference (also known as Risk Sharing) occurs when a business passes the risk to a third party. An example is a contract that limits liability of the parties’ respective obligations, or when a business owner purchases insurance to cover possible losses resulting from litigation, natural disasters, etc.
Risk Avoidance
Risk Avoidance is fairly self-explanatory. It takes place when a business decides to avoid engaging in or exclude a transaction because the risk does not fit within its risk tolerance level .
Risk Acceptance
Risk Acceptance is when a business decides to consciously accept the risk. When no forms of risk mitigation adequately satisfy the goals of the business, obtaining compensation coverage through insurance may be a viable answer for appropriate risk acceptance.
Risk Reduction
Risk Reduction helps minimize the risk through specific actions, controls, policies, trainings, procedures and protocols. This method is ideal for businesses wishing to maintain a specific level of risk, but still want to toe a fine line.
Each risk mitigation strategy should be carefully evaluated and reviewed to determine if each is in compliance with laws, regulations, codes, directives and/or guidelines. The issue of compliance, like risk mitigation, cannot be understated, although it typically is. Corporate counsel and boards are, often, expediently alerted of a potential risk to the company’s compliance and ethical procedures. Both issues, however, can easily be overlooked or dismissed.
To safeguard against compliance issues, many companies will, yearly, perform internal audits and review their policies and procedures to ensure adherence to them. Periodic employee training programs are also an effective tool to not only provide employees a good overview of the law, ethical requirements, company practices and procedures, but to make sure each has the information to consistently and accurately document and report their activities and actions.
Business Negotiation Techniques
In the commercial world, negotiations can provide critical opportunities for business development and problem resolution. To represent business clients effectively, a lawyer must be able to guide negotiations towards achieving client objectives.
A common misconception about negotiation is that it entails "winning." Any lawyer representing an entity with multiple stakeholders knows that clients often have competing interests that must be recognized. Thus, one of the lawyer’s roles in a business negotiation often is helping the client appreciate alternative perspectives and facilitate consensus.
The term "interest-based" negotiation was popularized by Harvard professor Roger Fisher in his book Getting to Yes: Negotiating Agreement Without Giving In as a tool for collaborative negotiators to obtain results that value long-term relationships among the negotiating parties. Interest-based negotiation works best when the negotiating parties will continue to deal with each other after a given negotiation has led to a final agreement (See, e.g., Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In (1981)).
In interest-based negotiation, as Fisher and Ury explain, parties attempt to find and agree upon acceptable resolutions to conflicts by focusing on mutual interests rather than on positions. The two can be separated by exploring:
In negotiation in the business context, particularly where legal rights are involved, there can be a temptation to focus on positions rather than interests. For example, where a large corporation sends a cease and desist letter to you or your client and insists that you/your client take immediate action to address the issue raised, your first response may be a point-by-point response that assumes the company is correct. But the fact is that you could be wrong and that the company’s letter may reflect its own bias. Unless you are committed to a very aggressive response, often the best response to this kind of first communication is to respond the way you would a letter from counsel – a courteous acknowledgement along with a description of your/client’s understanding of the situation, and an invitation to continue the discussion to explore options for resolution.
Decisions about negotiation strategies can be critical to effective client representation. A lawyer representing the target in a hostile takeover must be far more aggressive than a lawyer counseling a start-up on how to avoid legal problems. Some companies have their own preferred approaches to negotiation – based on their own experiences or business cultures – but it’s up to the lawyer to evaluate those preferences against the needs and preferences of the client in a given situation.
Which approach to take also can depend on the facts of the matter. Most lawyers have experienced the situation where a client insists that you send the harshest letter possible and then later tells you that you put the other side into a defensive position that made settlement harder. A more effective strategy might have included inviting the other side into a conversation.
Basics of Intellectual Property
Intellectual property considerations are also important to businesses and should be considered when business lawyers go to court to protect them. Intellectual property may include trademarks and patents, which also should be protected through proper legal documentation. Protecting intellectual property is very important because these intangible assets are commonly infringed in our new digital world. Do you know the differences between trademarks and patents? Understanding the distinction will help when a business lawyer goes to court in the event of infringement, as well as in planning a business.
Intellectual property refers to property of the mind that is not protected under traditional real estate. Think of the eBook you wrote and the videos you produced. A trademark is a name, symbol or other sign used to distinguish a product or service of one manufacturer or seller from those of others. For example , Coca-Cola is trademarked as is Nike. The test for a trademark is whether a "substantial number" of the public recognizes the mark as distinguishing particular goods or services. If not registered, the trademark may still be recognized as common law protection. Common law protection is generally until someone else claims infringement. However, once registered, a trademark has more protection. The registration is considered constructive notice to the public.
Patents are reserved only for new categories of invention that are useful in some way. A patent does not protect the idea itself — just the invention. You must be able to describe the invention properly in a written document for a patent to exist. Utility patents may be available for ideas, processes, designs or modifications to existing products. If the invention is not properly documented within one year, the inventor forfeits the right to a patent.