Going for the IPO – Is your company ready?

Going for the IPO – Is your company ready?

Taking a company public through an IPO can be a big step for continued growth. Renaissance Capital says the typical newly public company sees its share price rise by about 31% from their IPO price. Even though the prospects of public attention and an influx of money can be very tempting for business owners, it is still very important to sit down and seriously consider if your company is ready.

Theoretically, you can take a business public at any time, but launching an IPO at the wrong time can really hinder the company’s future prospects if things go wrong. If you’re considering taking your company public, talk with a business and commercial lawyer before you do. In the meantime, here’s a list of considerations to think about while deciding if your company is ready for an IPO.

  1. Vision: People are not going to invest in a company if it has few growth prospects or if it has a product or service that is relatively mundane or uninteresting. Investors are also going to want to see a long-term strategy for the company and innovation plans, especially if the market is saturated with competitors.
  2. Transparency: A public company is fully exposed to the world and is responsible for fair disclosure of information via social media and other platforms. They also have to be aware that certain news might affect the price of their stock. If your company is not particularly social media savvy or comfortable with communications, it might be best to avoid an IPO for the present time.
  3. Management:  Many people look at the strength of the team and board of directors while making an investment decision. A public company must have experienced leadership that is dedicated to complying with regulations on financial reports and has interest in sticking with the company for the future. A public company also is subject to board of director requirements and must have board committees assigned to different tasks.
  4. Market: Even the most promising IPO can be quickly derailed in a bad market. A market in decline usually sees a reduction in the number of IPOs because the market window closes. A company must be comfortable in projecting market trends and be prepared to modify timetables or plans if necessary, especially if economic conditions are worsening.
  5. Finances: One of the trickiest tasks for a newly public company is complying with SEC regulations. Experts usually suggest hiring a specialist in investor relations and human resource professionals to manage SEC reporting and stock options for employees. It is probably best to put a company IPO on hold if you are not ready to hire an outside expert or are not willing to go along with SEC reporting requirements for public companies.

There is a lot to think about when getting a company ready for an IPO. An experienced business attorney will be able to offer guidance and advice to you and your company. Working with a lawyer will also give you the chance to ask questions about different aspects of an IPO and discuss other options, like dual tracking. For further guidance, contact Willcox, Buyck & Williams, P.A. today for a consultation.

 

Should I Choose a Different Business Organizational Structure After the TCJA?

The Tax Cuts and Job Act (TCJA) will affect every type of business in America, regardless of its organizational structure. With the dizzying number of changes in the TCJA, some people are wondering if any types of businesses will get more favorable treatment. As a business owner, you might want to discuss the new laws with a business organization lawyer.

Most of the significant changes will not affect large businesses. Experts anticipate small and medium-size businesses will feel the majority of the impact, for better or worse. Since every company is different, it is impossible to state whether you should change from your current organizational structure to a different one because of the TCJA. You will have to learn about the tax changes and decide how they will affect your business.

Changes That Affect Corporations

C corporations used to have graduated federal income tax rates of 15, 25, 34, and 35 percent under the old tax law, unless you owned a personal service corporation, for which the tax rate was 35 percent. Beginning January 1, 2018, corporations (including personal service corporations) will pay a 21 percent corporate tax rate. If your company is not a corporation and the 21 percent rate would be beneficial for your business, you might consider incorporating.

Corporations subject to the corporate alternative minimum tax (AMT) had to pay a 20 percent tax rate under the old rules. Beginning January 1, 2018, there is no more corporate AMT.

New Rules That Impact Pass-Through Businesses

Beginning January 1, 2018, there is a new deduction for the net taxable income passed through to owners of sole proprietorships, partnerships, certain LLCs, and S corporations. The owner gets a deduction of 20 percent of his or her qualified business income (QBI). The TCJA includes numerous restrictions and limitations for the QBI deduction, including higher income levels. Special rules apply to owners of service businesses, such as doctors, lawyers, accountants, and other professional practices, which reduce the value of this deduction for income that is more than $157,500 for an individual taxpayer or $315,000 for a joint return.

TCJA Changes That Can Impact Any Type of Business Structure

There are numerous new rules in the TCJA that affect businesses. A few of the highlights include:

  1. You will no longer be allowed to deduct the full amount of business interest beginning January 1, 2018.
  2. You are, however, more likely to be able to utilize the cash method of accounting instead of having to use the more labor-intensive inventory method of accounting.
  3. Depreciation rules are more generous than in the past. Previously, you were limited to a maximum of $510,000 in depreciation deductions for qualifying property. Beginning January 1, 2018, you can deduct up to $1 million of depreciation. Another bonus is that more categories of property will qualify as eligible property.
  4. Unfortunately, the TCJA slashes business entertainment deductions. Beginning January 1, 2018, there will no longer be a deduction for business-related entertainment expenses. The old tax code allowed a 50 percent deduction.
  5. The TCJA has a Scrooge-like approach to business net operating losses (NOLs). Previously, NOLs were 100 percent deductible, but now, you can only deduct 80 percent of your losses, which compounds the misery of business losses.

Schedule a consult with a business organizations lawyer at Willcox, Buyck & Williams, P.A. today to discuss the business structure is most advantageous for your company.

Business Contract Performance – When is it a Good Idea to Breach?

Business Contract Performance – When is it a Good Idea to BreacBusiness relationships and undertakings are formalized with contracts. These contracts may be written or oral, but most complex business agreements are reduced to writing for obvious reasons. Business owners agree on the terms of the contract to ensure seamless performance by all parties to the contract. However, there are times when performing the contract is detrimental to the business or simply impossible. Does this mean the business owner’s hands are tied? Not necessarily.

There are instances where it is a good idea to breach a contract. Before doing so, however, it is best to consult a South Carolina contracts lawyer to comprehensively evaluate all possible legal scenarios.

When it is a Good Idea to Breach a Contract

  1. Efficient breach

    The idea behind efficient breach is that a party should be allowed to breach a contract and pay resulting damages if it would be more economical than actually performing the contract. There are times when a business owner is tempted to breach a contract because it would be more profitable or economically efficient to do so than actually performing the contract.

    If the economics of performance are unfavorable, efficient breach allows the business owner to choose the most economically feasible path while compensating the victim, essentially putting him in the position he would have been if the contract were performed.

  2. Contract is illegal

    An illegal contract is unenforceable and performance may land the business owner in legal trouble. For example, a contract for the sale of illegal goods or the provision of illegal services violates the law and if performed, could give rise to criminal charges. Breaching it is definitely a good idea.

  3. Contract obtained by fraud

    A contract that is obtained by duress, undue influence, lies and fraud is invalid since the party with power gains an undue advantage to force the other into an unfair or unconscionable contract. There is no true consensus or good faith, which invalidates the contract.

  4. Estoppel

    If one party excuses the other from performance of a contract, the other party can rely on that excuse. The party making the excuse will be held to his word and estopped from claiming breach.

  5. Lack of capacity to contract

    If any of the parties to the contract lacks capacity to contract (because they are underage, of unsound mind or for any other reason), the contract is voidable. A voidable contract, once rendered void, is legally unenforceable. Should this happen, it could cause significant losses to a business owner who had relied on it.

  6. Contract contained a mistake

    If the contract contained a mutual mistake or a material unilateral mistake that the other party knew or should have known about. This will render the contract voidable.

While nobody enters into a business contract with the intention of breaching the terms, there are instances where performing the contract would ultimately cause harm to the company. In these instances, breaching the agreement may be the best option for your company and shareholders.

If you are contemplating a breach of contract, you have several legal options available. Contact Willcox, Buyck & Williams, P.A. today for a consultation.

Do You Have an Exit Strategy? Know Your Options

Creating a business or startup is a bit like being a chessmaster—to be successful, you have to be able to see the endgame even before the game begins.  As you create a business plan and develop a strategy to accumulate capital, you should also be thinking ahead to how you will move on from your successful business to your next big thing.  If you are ready to start a business or simply need to update your business plan, talking with an experienced business formation and planning lawyer can get you on the right track. In the meantime, take a look at some of the most common exit strategies.

  • Sell It to Google!  (Mergers & Acquisitions)

Many startup owners hope to create such a successful and profitable company that larger, more established businesses will want access to what they’ve created.  For example, a technology startup may plan to develop a cutting-edge Virtual Reality platform that a corporation like Sony or Microsoft would want to expand its video game technologies.  For large corporations, acquiring innovation is often cheaper than developing it in-house, and for startup owners mergers can often be very profitable!

  • Keep It in the Family!  (Selling Your Interest)

Other business owners plan to exit their creation by selling their interest in the business to someone else who will take over.  This could be a family member or friend, or simply another businessman who sees the value in the company and is in a position to buy it and scale it.  This is a common exit strategy for family-owned businesses.

  • Go Public!  (Initial Public Offering)

Initial Public Offerings, or IPOs, were a very common exit strategy during the dot-com boom in the late 1990s and early 2000s.  An IPO is the way a privately held company becomes publically traded, offering investors the opportunity to purchase stock in the company in order to raise capital.  Recently, however, there has been a decline in the number of startups taking advantage of IPOs.  Reasons include the uncertainty associated with valuing the company’s stock as well as the duties that are owed to shareholders in a company.

  • Let It Ride!  (Operate the Business)

Some business creators plan to create a company that is simply a goldmine and can stand on its own as a profitable enterprise.  If they are successful, they can maintain ownership of their creation while retaining the services of a qualified, trusted individual to run the day-to-day operation of the company.  Their successful business can then provide a steady stream of income for additional ventures.

  • Shut It Down!  (Liquidations)

Some business creators don’t want to move on from their companies at all, but just want to run things until they’re finished.  For these business owners, it might make sense to simply plan to liquidate their business’s assets when they decide to wrap up their enterprise.

Regardless of the type of business you’re creating, your success will depend on planning ahead, and those plans should include an exit plan.  Our firm has been helping South Carolina businesses develop business plans and exit strategies for years, and our attorneys are available to help you create a custom exit strategy to maximize the value of your business while accomplishing your other goals.  If you’d like to speak with someone about developing your exit strategy, contact Willcox, Buyck & Williams, P.A. today for a consultation.

 

How Should I Structure My Nonprofit?

Nonprofit corporations do some amazing work, and many are able to do it because of their nonprofit status, which comes with many benefits.  Nonprofits can be eligible for tax exemptions, and their supporters are able to make tax-deductible donations.  Creating and operating a nonprofit isn’t difficult, but there are many rules that must be followed to maintain your nonprofit status.  By using a business organization lawyer to help carefully craft your organization, you can avoid running afoul of the rules and causing trouble for yourself down the road.

What Structural Protective Measures Can I Build into My Corporation?

Most nonprofits are incorporated under Section 501(c)(3) of the Internal Revenue Code, which has list of requirements and prohibitions that must be followed to maintain tax-exempt status.  That list makes a good starting place when considering how to structure your nonprofit, including the following points:

  • No Private Benefits
    The most obvious requirement for nonprofits is that they must be not for profit.  That means the organization’s “insiders,” such as its officers or members of its board of directors, are not allowed to take personal benefits from the organization (although officers are allowed to take reasonable salaries).  With that in mind, there are a variety of structural protections you can give your nonprofit to protect its status:
    1. Limit Executive Salaries
      A nonprofit’s officers and staff are allowed to be paid reasonable compensation for their services.  Treasury Regulations dictate that compensation is reasonable if the organizations board of directors (or other governing body) approved it ahead of time after considering appropriate information, and then documents the reasons for their decision.  By requiring this to happen before any compensation is paid, you can protect your nonprofit from violating this rule. 
    2. Preclude Board Salaries
      Most nonprofit boards of directors are composed of members who volunteer their time.  By requiring that your directors receive no compensation for their services as directors, you can avoid the question of private benefits altogether.
    3. Have Public Books and Frequent Audits
      Finally, you can avoid many questions through transparency.  The more information you make public about what assets come into your organization and where those assets go, the less likely you are to be accused of improprieties.  Requiring your nonprofit’s treasurer or other chief financial officer to conduct and publish frequent audits can protect against potential future problems.
  • No “Non-Exempt Activities”
    Tax-exempt status under Section 501(c)(3) is given on the condition that the organization only conduct operations for approved purposes, such as scientific research or charity.  You can ensure your nonprofit remains in-bounds by placing responsibility with its president or chief executive officer to keep the organization’s activities within the limits of its mission.  You can build in further protections through requirements such as having the board of directors approve any new projects and having the nonprofit’s secretary keep an explanation of how each project furthers the mission in the board’s minutes.
  • No Political Campaigning
    The last major prohibition for nonprofits under Section 501(c)(3) precludes them from attempting to influence legislation or political campaigns.  Clearly that means your articles of incorporation and bylaws should explicitly forbid such activities, but there are other structural protections you can create.  For example, your bylaws can require the chief executive officer and/or the board of directors to approve any printed materials prior to publication.  And in the age of social media, it’s very important to have policies declaring who may post social media messages in the nonprofit’s name, the topics those messages may address, etc.  

 If you’re thinking of starting a nonprofit, you probably have questions.  Our firm’s attorneys have helped many of our clients’ organizations incorporate and seek nonprofit status, and would be happy to guide you through the process as well.  If you would like to speak with an attorney about structuring your nonprofit, contact Willcox, Buyck & Williams, P.A. today for a consultation.

What To Expect During An Arbitration Proceeding

With just about every court in the country facing a backlog of months to years, alternative dispute resolution is becoming an attractive way for parties to “litigate” their disputes in a more timely and private fashion. While most people have not seen the inside of a courtroom, even fewer have been involved in arbitration proceedings. This article sheds some light on what a typical business dispute arbitration process can look like. If you think that you may be required to arbitrate a contractual dispute, it is important to seek the advice of a lawyer experienced in alternative dispute resolution.

An “Informal” Process

Arbitration is often described as an “informal process” designed to allow parties to resolve their disputes in a relatively quick and private manner. This is a misnomer. Arbitration proceedings are not to be taken lightly. In many cases, the decision of the arbiter is binding, so it is best to take the process seriously.

The Players

Every arbitration will have at least two parties in opposition. These parties may be referred to as plaintiffs and defendants, although they may also be referred to as claimants and respondents. Like plaintiffs, the claimants are the individuals or groups that bring a claim. Respondents, like defendants, are the individuals or groups that respond to the claim. In most cases, each party will be represented by one or more attorneys, although this is not a requirement for individuals and some businesses.

Instead of a judge, arbitrations are heard by one or more neutral persons called arbitrators or neutrals. Often, the arbitrator is a retired judge. In the best circumstances, the arbitrator is experienced in the type of legal matter that is being heard. Both parties are involved in choosing who will be the arbitrator.

Pre-Arbitration Process

Once the parties have chosen the arbitrator, one party will initiate the arbitration process by filing a claim. This is akin to a complaint in the normal court process. The respondent will file a response. From this point, the parties engage in the discovery process. This involves scheduling depositions and exchanging demands for documents and other evidence. The arbitrator may place deadlines on this phase of the process.

During the time, both parties will determine who will serve as witnesses and whether expert testimony is required. Based on the evidence, the parties will each build their case. In many cases, the arbitrator will ask for both parties to submit briefs summarizing the factual and legal issues in the case. The parties will also be asked to submit evidence to the judge supporting their claims and defenses prior to the arbitration date. The parties may also file motions to exclude evidence, called motions in limine. The arbitrator will generally rule on these motions before testimony is heard.

The Arbitration

Depending on the complexity of the case, arbitrations can take days, weeks or months to complete. During this time each party will have the opportunity to present witnesses and evidence to the arbitrator. Most attorneys will generally insist upon having a court reporter present to record all of the testimony. This allows them to help build their case and perfect their closing brief at the end of the arbitration.

Throughout the arbitration attorneys for each side may issue objections to certain testimony or evidence being submitted and the arbitrator will rule on those objections just like a judge would in any normal court proceeding. When both sides have presented all of their witnesses the arbitrator will ask each side to provide closing briefs and/or schedule closing arguments.

Once all briefs and arguments have been made, the arbitrator will issue a ruling. If the terms of the agreement require the arbitration to be binding then both sides must adhere to that ruling.

If you are facing a dispute that may require arbitration and would like to speak with an attorney, contact Willcox, Buyck & Williams, P.A. today for a consultation.

 

What You Need to Know About Business Capitalization in South Carolina

The State of South Carolina is actively working to improve the business climate within its borders, particularly focusing on bringing innovation to South Carolina.  Early in 2017, the South Carolina Department of Commerce published an Innovation Plan analyzing the current state of affairs and making recommendations for improving options for businesses.

In particular, the South Carolina Innovation Plan notes that many new businesses struggle to obtain sufficient capital from banks and traditional lending institutions, and instead are forced to turn to seeking venture capital through “angel grants” and other forms of direct investment.  The plan further notes that due to the scarcity of capital within South Carolina and the increasing amount of time and resources required to locate and secure it, many new businesses are looking across state lines to secure the funding they need. While you may not need a commercial lawyer right now, when you begin to seriously think about raising capital, it can’t hurt to talk to one about the ins and outs of raising capital.

Registering to Raise Capital

Both federal and South Carolina securities laws have regulations requiring businesses to register with the government before offering securities in order to raise capital.  However, these regulations were generally intended for large businesses that plan to raise large amounts of capital, and there are exemptions to the registration requirements that apply to most small and mid-sized businesses.  Because the registration process is so expensive and time-consuming, finding and using an appropriate exemption to the registration requirement is typically a good first step.

Private Placement

For some businesses, a Private Placement of Securities or Private Equity Offering can be a good solution.  Private placement is available to companies who are offering their securities for sale to a group of investors entirely within the State of South Carolina.  Typically businesses take advantage of private placement when their investors will be family and friends, “angel investors,” or South Carolina institutions.  Raising capital through a private placement does NOT require the business to register with the government, reducing the time and cost of raising capital.  Private placement also allows the business to custom-tailor investment opportunities to targeted investors, as well as maintain the confidentiality of information that could otherwise be required to be disclosed in a public offering.

Crowdfunding

“Crowdfunding,” or securing small amounts of capital from a large number of investors, is one of the hottest topics in capitalization today.  In 2013 the U.S. Securities and Exchange Commission removed its prohibition on businesses advertising the fact that they are raising capital without registering first.  However, the SEC has been slow to implement rules governing capitalization techniques like crowdfunding, causing many states to create their own regulations.  In South Carolina, qualified for-profit businesses can “crowdsource” up to $1 million annually without registering.  To qualify, a business must be formed and based within the State of South Carolina, and the securities must be marketed and sold exclusively to South Carolinians.  For the moment, that means internet advertising that could be viewed by someone outside the state is impermissible.  Notice also must be provided to the State along with a $300 filing fee.

If you’re in the process of creating a business or expanding your current business, securing sufficient capital is likely one of your biggest headaches.  Our firm specializes in helping South Carolina business owners successfully capitalize their businesses as efficiently and cost-effectively as possible.  If you have questions about capitalization and would like to speak with one of our attorneys, contact Willcox, Buyck & Williams, P.A. today for a consultation.

Shareholder Derivative Actions Explained

When you invest your hard-earned money in a corporation, you do so with certain expectations.  And in fact, both South Carolina and federal laws place requirements on the corporation’s officers to meet a set of reasonable expectations.  As a shareholder, the law also gives you a certain set of rights to help you protect your interests.  One of those rights is the right to initiate a “derivative action.”  

A derivative action is a lawsuit that is filed by a shareholder on behalf of the corporation when the corporation’s leadership has failed to act.  Although it doesn’t have to be the case, shareholder derivative suits are usually filed when a company’s officers have breached a fiduciary duty or otherwise acted improperly against the company and its shareholders, such as receiving excessive compensation, misappropriating corporate opportunities, or committing corporate waste.  Unlike claims in which a shareholder sues the corporation directly for what he or she considers to be unacceptable losses to his or her investment or for a failure to pay dividends, in a derivative suit the shareholder is suing for the corporation against a third party—usually the corporation’s officers. When this happens, it is essential to call on a business and commercial law lawyer.

Requirements for Bringing a Shareholder Derivative Action in South Carolina

Shareholders stepping in to sue on behalf of a company is an extraordinary measure, and South Carolina law places limits on who can do it and when.  In general, the following are the requirements to have “standing,” or the right to sue, in a shareholder derivative action:

  • The shareholder must fairly and adequately represent the interests of the corporation
  • The shareholder must have been a shareholder at the time the alleged inappropriate or illegal activity occurred, or received his or her shares from a shareholder who was a shareholder at that time (such as through an inheritance)
  • Before bringing a lawsuit, the shareholder must first make efforts to resolve the situation with the corporation directly outside of court, and his or her court filings must state specifically what efforts were made, or else explain why no such efforts were made

Additionally, once a shareholder brings a derivative action to court, he or she is generally obligated to see the action through to the end without settling the case.  The court’s permission is usually required to settle the case or otherwise remove it from the court’s calendar, and other shareholders who could be affected are usually required to be notified.

Corporate law is a vast and complex world, and can often be unfriendly to shareholders and other investors.  If you have a stake in a company, concerns about how your investment is being handled can cause a lot of stress and anxiety.  The best cure for that is understanding exactly what is going on, and what you can do about it.  

Our firm has been practicing corporate law in South Carolina for years, and our attorneys have helped countless shareholders resolve problems concerning their investments.  If you’re worried about how your investments are being handled and would like to speak with an attorney, contact Willcox, Buyck & Williams, P.A. today for a consultation.

3 Top Reasons Why Business Contracts End Up in Court

Any good business person needs to stay aware of current trends, and one important trend to be on top of is why business contracts end up in court.  Without the help of a contracts lawyer, it’s hard to avoid pitfalls without knowing where the pits are. Based on the most recent research collected by the federal Bureau of Justice Statistics in 2001 and 2005, there are some very common trends in business litigation.  Among the highlights:

  • The majority of contract litigation (61% of cases) involves either a seller suing for payments that are owed, or a buyer suing to get their money back for a product or service they had a problem with;
  • One-third of contract cases involve an individual suing a business; one-quarter involve a business suing another business; and
  • The vast majority of cases filed (99%) are not resolved by trials, and nearly half are settled or withdrawn.With this information, it’s easy to see that if your business is going to be involved in a legal dispute about a contract, it will almost certainly be over a monetary transaction, and will almost certainly be resolved outside of court.

Why are so many cases resolved outside of court?

According to BJS reports, nearly 80% of cases are resolved for one of three reasons:

  1. Settlement
  2. Withdrawal
  3. Default judgment

Cases settle for all kinds of reasons.  One frequent cause of settlement is uncertainty—when it’s not clear who is right or which way the court will rule, often parties choose to control the case’s outcome by settling rather than allowing the court to decide, which could potentially go very poorly for either side.  On the other hand, many cases are withdrawn for the opposite reason—when it’s clear that one side has the law on its side, the party suing that side will often realize the futility of their lawsuit and withdraw it from the court.  Similarly, when parties know they have no arguments that will persuade the court, they frequently simply fail to appear to defend themselves, causing the judge to issue a ‘default judgment’ for the other side.

How can I use this information to protect my business from litigation?

With all of this information in mind, it becomes clear that one of the most critical steps a business can take to protect itself from litigation is to eliminate uncertainty from its contracts.  After all, if a contract clearly indicates what the two parties agreed to in a given situation, there is usually nothing left for the court to decide.  Common areas of uncertainty include:

  • Lack of Specificity.  A good contract needs to be explicit on every important detail.  If goods are to be delivered, when will they be delivered, and by whom?  Where will the goods come from?  Do they need to be of a particular quality or have other specific features?  Leaving out any detail can lead to uncertainty, which can in turn lead to court.
  • Lack of Exhaustiveness.  Even contracts that are specific in their details can have problems if they aren’t thorough enough on what situations are addressed.  In our goods example, what happens if the goods are late?  What if most are on time but some are late?  Who will bear the risk of loss or damage while the goods are being transported? Having an expert attorney assist you in drafting your contracts will help you identify and address possible future problems before they arise, increasing the level of protection your contract provides.
  • Lack of Participation.  Finally, it’s important that all sides of the contract are involved in its negotiation.  After all, a contract is an agreement between the parties, and blindly agreeing to the contents of a contract can be a recipe for disaster.  Taking input from everyone involved can help prevent unrealistic expectations from being incorporated into the contract, minimizing the potential for one side or the other to fail to do what was expected of it and precipitating a lawsuit.

Like most things, expertise in writing ‘bulletproof’ contracts can only come from experience.  Our attorneys have honed their skills through years of negotiating and litigating business contracts, and would be happy to assist you with your contract problem.  If you have questions or concerns about a contract, contact Willcox, Buyck & Williams, P.A. today for a consultation.

Top 5 Business Contract Considerations To Reduce Business Risk

As a businessperson, you are likely faced with multiple contract issues on a daily basis. The more contracts you read, the more numb you can become to the words endlessly flowing down, page after page. It’s easy to become complacent about the provisions in each contract, especially if you have not faced a breach of contract action. Even business and commercial lawyers can start glazing over after too many hours going over contract provisions. This can be highly detrimental to your business.

If you’ve been in business long enough, you likely have a series of staple contract provisions that you include in every contract. That is a smart move. no sense reinventing the wheel. However, these staples should be reviewed periodically to ensure your business model has not outgrown them or that the laws haven’t changed. Additionally, there are certain provisions that need customization and careful attention. We’ve identified the top five things you need to consider when drafting or reviewing any contract document.

  1. Identify Key Risks

    Business contracts are all about balancing potential risks with potential benefits. For each contract you enter into, think carefully about the risks that might occur if things start to go sour between you and your contracting partner. Typical risks may include:

    • “It’s not you, it’s me…” – people break up all the time, whether it’s a romantic relationship or an economic one. Sometimes we’re just better off without that other person. If faced with this type of economic breach, ask yourself: what does that risk look like and how can you mitigate it?
    • “You lied to me…” – sometimes parties don’t live up to the promises they make in their contracts. Services aren’t up to par, significant deadlines are missed or some other material breach affects the relationship.
    • “I’ve found someone else…” what happens when your contracting partner starts cavorting with one of your competitors?

      Other risks may involve risks to third parties, such as customers you serve. What happens when your client’s data is breached or your company cannot continue a contract due to the other party’s failure to pay?

  2. Limit Your Liability

    Every contract should have provisions to allocate risk between the parties by limiting damages. Some companies choose to limit non-economic damages or strictly prohibit punitive damages. So long as the limiting provisions do not violate public policy, just about anything goes.

  3. Consider Damages Caps

    Depending on the type of contract you are entering into, you might consider capping your damages to the total contract amount, or some other amount that makes sense given the transaction, yet does not violate public policy.

  4. Choose Your Remedies

    When looking at your potential risks, consider whether simply suing for breach of contract is sufficient for your needs. Might you also want liquidated damages, termination rights, or injunctive relief? Do you want the other side to pay your litigation fees? What about Jury trials vs. binding arbitration?

  5. Elect Indemnity Style
    Indemnification is one of the most critical provisions in a contract, so review carefully. There are two general indemnity structures:
  • Defend and Pay – the indemnifying party covers the defense or cost of defense, as well as paying damages.
  • Insurance Style – makes the indemnified party whole following a breach.

Determine whether all risks warrant indemnification and carve out exceptions as necessary. If there is ever a provision you don’t want to skim over, the indemnity provision is the one.

If you are in need of sound contracting advice, contact Willcox, Buyck & Williams, P.A. today for a consultation.