By Dominic Davis – Attorney, SW&L Attorneys
When businesses prepare their budgets, they often account for expected costs but may not realize how quickly even a minor legal issue can escalate into a complex and expensive challenge. Hidden costs can catch even the most experienced owners off guard, particularly when it comes to legal expenses. From contract disputes and liability claims to tenant issues and regulatory compliance, these expenses can arise suddenly and without warning, eating into profits and disrupting operations. In this article, we’ll explore some of the most common—and frequently overlooked—legal expenses that businesses face and provide strategies to help mitigate their impact on your bottom line.
Formation and Maintenance
In North Dakota, businesses and organizations can be structured in various forms, each with distinct legal and operational characteristics. The primary types of entities in North Dakota include sole proprietorships, partnerships, limited liability companies (LLC), corporations, and non-profit organizations. Each structure comes with its own set of legal requirements and potential liabilities. One often overlooked expense is the cost of properly forming and maintaining these entities to
avoid personal liability.
Setting up an LLC, for example, is widely regarded as a prudent move for business owners and landlords looking to shield their personal assets from potential business liabilities. However, the process of setting up and maintaining an LLC is more complex than simply filing paperwork. Failing to adhere to the legal requirements of running an LLC can expose you to personal liability, effectively piercing the veil of protection you sought to create.
Establishing an LLC involves more than just registration. Business owners must ensure that they follow specific rules, including maintaining proper corporate formalities such as keeping separate bank accounts, holding annual meetings (when required), and accurately documenting important decisions. Without these safeguards, courts may determine that the LLC is merely an extension of your personal dealings, allowing creditors or plaintiffs to go after your personal assets. This complexity highlights the importance of consulting with an attorney during the formation process and periodically throughout the life of the LLC, particularly when making significant decisions, to ensure your business is managed in a way that minimizes personal liability.
Entity Representation in District Court
One of the most frequently overlooked legal expenses for businesses is the cost of legal representation in court proceedings. In North Dakota, legal entities such as LLCs may be prohibited from representing themselves in legal disputes depending on which court the case is filed with. This general requirement was established in United Accounts, Inc. v. Teladvantage, Inc., 524 N.W.2d 605, 606-07 (N.D. 1994), where the North Dakota Supreme Court held that “just as one unlicensed natural person may not act as an attorney for another natural person in his or her cause, an unlicensed natural person cannot act as legal counsel for an artificial person, such as a corporation.” This means businesses must often hire licensed attorneys to represent them in court.
While this precedent helps maintain legal standards, it can also lead to significant, unanticipated costs. Business owners often assume they can handle disputes without professional help, but unbeknownst to them the law may require otherwise. Understanding this requirement upfront can help businesses budget for legal representation, reducing the likelihood of unexpected expenses and ensuring that legal disputes are managed professionally and efficiently. Because laws are constantly changing and exceptions may apply to the general rule, it is always wise to consult with an attorney before engaging in litigation to discuss your situation and to determine the potential costs and potentially cheaper routes for recourse.
Delinquent Accounts
Perhaps the most common situation is dealing with a customer or client who hasn’t paid their invoice. Whether it’s a delay in payment or a complete refusal, delinquent accounts can have a significant impact on cash flow and profitability. For businesses, the legal costs associated with pursuing unpaid debts can be unexpectedly high. From sending formal demand letters to filing a lawsuit, the process of collecting outstanding payments often requires legal intervention, which adds to the overall expense.
In North Dakota, businesses must ensure they follow proper legal procedures when attempting to collect from clients in arrears. This can include adhering to debt collection laws that protect consumers from harassment, as well as ensuring any lawsuits filed to recover unpaid amounts are properly handled through the courts.
Addressing delinquent accounts promptly and having clear contract terms regarding payment obligations can help mitigate these risks. Businesses should also be proactive in assessing the cost-benefit analysis of pursuing unpaid invoices through legal means, balancing potential recovery with the legal expenses involved.
Evictions: More than just lost rent
For rental property business owners, evictions are an unfortunate but sometimes necessary part of the business. However, the legal and financial costs associated with evictions can far exceed expectations. Evicting a tenant may seem straightforward, but in reality, it involves navigating a maze of legal procedures. North Dakota law requires landlords to follow specific steps to legally remove a tenant, such as providing proper notice and, when necessary, filing a lawsuit to obtain a court order for eviction. Failure to comply with these legal requirements can lead to costly delays or even dismissal of the case.
In addition to legal fees, landlords must also account for the lost rent that accumulates while the eviction process unfolds. A nonpaying tenant can hinder and drain a property’s earning potential if an eviction isn’t initiated promptly. When factoring in attorney fees, court costs, and lost rental income, the overall cost of an eviction can be substantial. This makes it essential for landlords to budget for these legal risks in advance and work with legal professionals to ensure that eviction procedures are handled efficiently and in compliance with the law.
Conclusion
Unforeseen legal expenses can be a significant burden on business owners’ mental and financial well-being. Whether it’s the cost of setting up and maintaining a legal entity, hiring legal representation for litigation, collecting unpaid invoices, or managing evictions, these hidden expenses can quickly add up. By understanding the common legal risks and proactively planning and budgeting for them, business owners can better protect themselves from unexpected financial strain. Working with legal professionals and staying informed about the complexities of the law are key steps to ensuring that your business operates smoothly, minimizing potential liability, and avoiding costly surprises.
SW&L Attorneys
4627 44th Ave S, Ste 108,
Fargo, ND
701-297-2890
swlattorneys.com
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