During some recent engagements with new clients, we discovered they were missing key pieces of legal infrastructure or overlooking certain registration requirements. Because situations like this aren’t uncommon among small businesses, particularly when resources are low and growth is fast, we thought it was an important subject to discuss with all of our readers. So in this blog post, we’ll cover common organizational and legal oversights—and various ways we’ve helped our clients avoid and overcome them.
Introduction
Running a business is complex. From getting things off the ground, to managing operations and marketing, to handling finances and customer relations…business owners and organizational leaders are forced to wear many hats. Yet, amid all these responsibilities, legal oversights can happen – areas where organizations unintentionally overlook crucial legal obligations.
For purposes of this blog post, “legal oversights” are gaps in an organization’s understanding or management of its legal duties. These can arise for various reasons, but typically are due to some lack of awareness of legal requirements. For many businesses, these oversights don’t surface immediately but can lead to consequences such as falling out of compliance with governmental requirements (risking increased fees or fines), operational disruptions, opening to unnecessary liability, or worse, legal action.
First, we will discuss causes of legal oversights. We will then discuss common areas of legal oversight. Finally, we will discuss solutions and share how our firm has supported clients in reaching their organizational and legal goals to avoid oversights using legal audits.
Causes of Legal Oversights
Organizations may overlook legal compliance obligations for any number of reasons. Examples can include a lack of awareness that certain legal requirements exist, lack of knowledge of certain risks, rapid growth of an organization, evolving laws, or simply underestimating the scope of legal requirements. Newer businesses may be more susceptible; as businesses expand, legal complexities multiply, and existing practices may not keep pace. Further, in an effort to move quickly or keep costs down, owners might prioritize progress and operations over legal oversight. Unless an organization is informed of its legal compliance obligations and is vigilant of deadlines and changes, it can miss crucial requirements. This can be a normal growing pain of running a business, but it can often be avoided with the correct foresight.
Common Areas Where Legal Oversights Occur
Below are common areas where we find that legal oversights occur. Please note, this is not an exhaustive list, and other areas of oversight may exist.
State Business Registration Concerns
When forming an organization, certain filings are required in the state of formation to create the entity (for example, articles of organization, articles of incorporation, etc.). However, most states also require annual filings with their secretary of state office (including a fee), where the entity reports its basic information that was included in the original formation filings and any changes over the year. Some states also require filings with other state departments – such as tax or labor/employment – depending on the nature and status of the business. Apart from that original filing, these annual and other state required filings can often be overlooked for various reasons: the business address might change causing it not to receive notice of these requirements from the relevant authority, or the state requirements may be unclear to the business upon formation. Further, organizations that operate across state lines may be subject to registration requirements in those other states. Missing any of these filings could cause the business to be delinquent on filings, to face fees, and eventually, if not addressed, to be administratively dissolved.
Internal Management
When growing quickly it is easy to overlook documenting the organization’s decision-making or complying with its own infrastructure. Organizational decisions should be documented, board and member meeting minutes should be kept so that discussions and decisions are documented, and governance documents (such as bylaws or operating agreements) and formal policies should be followed to provide clarity and consistency to the stakeholders of the organization. If these organizational formalities are not carried out, stakeholders may become confused or frustrated with the business, or worse, the organization’s liability protections could be jeopardized.
Employment Law Compliance
Many small- and medium-sized businesses may unknowingly fall short on employee classification, wage and hour rules, workplace safety, or harassment policies. For example, misclassifying employees as independent contractors, or misclassifying independent contractors as employees, is not uncommon. Further, new and growing organizations may not realize when they are subject to state and federal employment laws, especially those that only apply once the organization has hired a certain number of employees. Misclassifying workers or failing to comply with employment and labor laws can create legal liability, especially if a dispute with workers arises. It is critical to know what employment or labor requirements a business needs to comply with.
Intellectual Property Protection
Intellectual property protection is often overlooked, especially when organizations form and grow quickly. For example, unless there is clear documentation on whether the organization or the individuals servicing the organization own the intellectual property core to the business, there can be uncertainty and potential splintered ownership, which could be costly to secure in the future. Further, failing to secure trademarks, trade secrets, copyrights, or patents can leave a business vulnerable to infringement or loss of valuable assets. Conversely, businesses may inadvertently infringe on others’ rights due to lack of due diligence or lack of proper licensing. It is critical to know how and what intellectual property of an organization is protected.
Contract Management
Organizations sometimes operate without clear, enforceable contracts with their clients or business partners, or may simply neglect periodic reviews of existing agreements. Further, using contract templates for a business that have not been properly vetted by legal counsel may be risky because the template might not be tailored to the specific organization. These types of oversights can subvert expectations, expose an organization to unexpected liability, or weaken their bargaining position in future relationships.
Data Privacy and Security
Most organizations have websites for their businesses. However, privacy law frameworks in the United States (and when operating globally, privacy law frameworks of other countries), apply to how businesses collect, use, and maintain data from their customers and particularly those visiting their website. Many organizations are unaware of their obligations regarding data collection, storage, and disclosure that are imposed by state laws, and noncompliance could lead to state penalties and loss of trust from those using the organization’s services. It is important to have compliant data privacy infrastructure and processes, and to diligently follow such processes.
Licensing and Regulatory Compliance
Certain industries, such as food service, healthcare, finance, construction, and many more, have specific licensing and regulatory requirements. Overlooking renewals or changes in regulations can risk interruptions to business operations or invite government penalties. Importantly, organizations need to know whether they have, or need, further licensing, and how to comply.
How to Address and Prevent Legal Oversights.
There are various ways organizations can address and prevent legal oversights. First, is ongoing education. Keeping informed about relevant laws and industry regulations is essential. Often, state secretary of state offices have resources that can inform organizations of their state compliance obligations. However, they are not always comprehensive or easy to navigate, and do not always consider federal or local requirements. Second, ensuring robust documentation – of contracts, employment policies, intellectual property, governance matters – can help an organization stay organized and on top of compliance obligations. Finally, investing in legal counsel can be hugely important. Early involvement of attorneys in business decisions can save time and money down the road.
Legal Audits
To help clients identify, address and avoid legal oversights, our firm offers Legal Audits. These audits examine the core operations of an organization, uncover unresolved legal issues, and provide recommendations to address compliance gaps. We offer two types of legal audits:
- “Basic Legal Audit,” which includes a one-hour call where we come prepared with questions, talk with organizations through various topics related to organizational and legal compliance, and identify any issues and action items needed to improve their legal compliance. There is also flexibility for the organization to bring up any general concerns they have on the call.
- “In-Depth Legal Audit,” which expands upon the Basic Legal Audit by taking a deeper dive into the organization’s legal compliance and organizational structure. We first conduct an advance review of certain materials (the organization’s formation documents, minutes, current contracts, etc. Then we’ll hold a similar audit call with a wider scope. Additionally, we provide a report after the call that details our findings and any suggested actions to improve legal compliance.
Final Thoughts
Legal oversights are often invisible until they cause harm. Proactively identifying and addressing these areas can prevent costly legal disputes and build a stronger foundation for sustainable growth. Every business, regardless of size or industry, benefits from a vigilant legal strategy. If you’re uncertain whether your business has legal oversights, consulting with a qualified attorney can help provide clarity and protect your company’s future.
Legal audits are a highly effective way to get a pulse on your organization’s compliance status and identify critical changes that are needed. If you’re interested in a legal audit for your organization, you can contact one of the attorneys at our firm directly, or email us at info@jrwiener.com.
