“An ounce of prevention is worth a pound of cure” – Benjamin Franklin
Benjamin Franklin’s famous words were written to advance fire safety. Shortly thereafter, in December 1736, the Union Fire Company was formed and Philadelphia became the safest city in the colonies.
Then, as now, survival does not allow for rest. The survival of any business requires being prepared, organized, and ready to respond. Set into this milieu comes the rise of the legal audit. As businesses look for ways to reduce their exposure to risk as well as comply with the onslaught of new regulations, I recommend an annual review with the company’s attorney and insurance broker to avoid expensive legal expenses down the road.
What is covered in an annual legal audit?
Some of the items will be specific to the company and the industry they are within. For example, the audit for a vegetarian restaurant will be different than that of a veterinarian practice. But here’s a look at the following common key areas all businesses should review in an annual audit.
Corporations, LLCs and other business entities should hold annual meetings and memorialize the proceedings in the form of minutes. If you haven’t followed this important corporate formality, corporate clean up services are available. The minute book containing key corporate documents should be kept up to date. This will be crucial in the event of a surprise IRS audit. It is also good practice for avoiding a piercing of the corporate veil and the imposition of personal liability for corporate debts.
The corporate directors or LLC managers should be properly listed with the state of formation (and qualification). Failure to stay current could mean that certain company decisions may be voidable. The lines of authority should be respected and maintained as a matter of proper governance.
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3. Intellectual Property
An audit can uncover the need for trademark, patent, copyright and/or trade secret protection. Asserting and maintaining intellectual property rights is a key business strategy that can lead to the creation of valuable company assets. An annual review of these issues is not only prudent but vital to the company’s future.
In the crush of commerce many things can slip by unnoticed. Did you hire a few new people this year? Did they sign employment agreements? Do you have the protections in place involving trade secrets, non-solicitation, non-competition, and confidentiality? A legal audit will identify any gaps.
An annual audit can also reveal if all the required postings and workplace paperwork is in order. Have you properly posted the EEO and minimum wage notices? These seemingly benign matters come with penalties for non-compliance.
If you have an employee handbook, do any of the policies require revision? Your company attorney may not pursue this important issue. Likely, they are too busy to even ask. It is up to you to handle it.
An annual insurance review is always recommended. Is your existing insurance adequate for your ever-changing business and the market in which you operate? If your business is expanding, is your current insurance at the right level to cover your increasing risks?
Since almost every business has some sort of internet presence nowadays, you must analyze if you need the newest form of protection—cyber liability insurance. If you accept orders over the web, if you store any customer records electronically, or if you have any interface at all with the internet, you must consider cyber liability insurance. With all the hacking and illegal activity associated with electronic records, this issue must be discussed in your next insurance review.
The ounce of prevention a legal audit will provide can save many thousands of dollars in legal and other unnecessary costs when an identifiable issue becomes a major problem. Work with your attorney and insurance broker this year and every year to put out the fires before they harm the entire organization.
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