Starting a Business – Do it Right or Pay a Premium to Clean it Up

Startup mistakesWe recently represented a client in a lawsuit with a business partner. Our client sued for a breach of contract involving loans made to the partner. The business partner responded by filing a litany of counterclaims for breach of contract, breach of fiduciary duty, tortious interference, and trademark infringement (which turned out to be a costly error in judgment).

This was, unfortunately, a common scenario: individuals coming together with a promising business plan but no plan for implementing the legal framework to build out the business. Specifically, no bylaws/operating agreement, business agreements, assignments of intellectual property, etc. So, after spending tens of thousands of dollars and hundreds of hours the former partners had a legal mess on their hands. Or as opposing counsel put it “a cluster f*ck.” But this scenario can and should be avoided.

Starting a business is an investment; make sure you protect it.

If you think of starting a business as an investment of your time, money, and other resources, it only makes sense to try to protect that investment. And the first step to protect your investment is to work with the appropriate professionals, such as business attorneys and financial professionals. Yes, this will cost money; but it will cost significantly less money than trying to clean up any legal mess that may later arise.

Case in point, returning to the business dispute that started this post, the case, as with most civil lawsuits, was referred to case evaluation. In Michigan, case evaluation is a court mandated process where the litigation is presented to a panel of three attorneys. These attorneys place a “valuation” on the lawsuit. This valuation is accepted or rejected by the parties. If accepted and the award is paid, the case is resolved. If not, the case proceeds, but under the cloud of potential case valuation sanctions, depending upon the outcome.

Proper business planning will cost less than cleaning up a business mess.

Here, the case valuation panel made a monetary award in our client’s favor, which was slightly less than the damages sought in the litigation. The former business partner, however, was not so fortunate: the panel awarded one dollar (an award of zero dollars triggers certain penalty provisions in the form of sanctions under Michigan’s case valuation rules). Clearly the panel thought very little about the merits of the counter-claim. But even with both parties (thanks to their attorneys working well together) spending a relatively modest amount in legal fees, neither party came out ahead in the end.

The moral of the story, make a modest investment in a good attorney who is going to work with you to create the legal foundation to successfully build your business. Otherwise, you will likely find yourself picking up the pieces and spending significantly more to do so. For more information about starting a business, contact business attorney Jason Shinn to set up an initial consultation about your business plans. Since 2001, Mr. Shinn has worked with entrepreneurs to transform business plans to business operations.