If you don’t, why should I?

Over the past six weeks, I have been teaching a graduate level business law course for the Johns Hopkins University Carey School of Business. For three hours each Monday evening, I find myself explaining to 31 graduate students the legal and business concepts that form the foundation of the services we offer our clients as a firm.

Over and over again, I have returned to the question: “if you don’t, why should I?” in order to illustrate one of the key points about business and asset protection. Take, for example, the question of corporate formalities. Many businesses fail to keep and maintain corporate minutes and some business owners even commingle their personal and business funds on a regular basis.

In each instance, the owner things to himself, “why does it matter?” “After all,” the rationalization goes,“ I own the company, so it’s my money anyway. What’s it matter if the company buys me dinner or pays for my gas? It’s all the same in the end. Similarly, many business owners view corporate minutes as a waste of time. They’re drafted, perhaps accompanied by an attorney’s invoice, and then gather dust, unexamined in a drawer or minute book – all seemingly to authorize something you already did and nobody questioned.

But here’s where the judge comes in. When a business owner finds himself standing before a judge, it is often with the hope that the personal asset protection promised by a corporation or LLC holds up. After all, that’s why the owner formed the corporation or LLC in the first place – to protect his or her personal assets. The protection, however, is not inviolate or by any means guaranteed. In non-technical terms, the corporation must look, act, and feel like a corporation. If not…if corporate and personal funds are commingled and if corporate formalities were not observed, the court may find that the corporate protections just aren’t there.

In other words, the business owner may hear those dreaded words from the bench: “If you haven’t treated the business like a real corporation, why should I?”

The same holds true for trade secrets and intellectual property such as trademarks and copyrights. Protections are available to the vigilant business owner, but they are not inviolate and are not guaranteed to be there if called upon. If the business owner is cavalier with his or her trade secrets by failing to take reasonable measures to protect them, chances are s/he will be unable to convince a judge that the secrets are worthy of protection when it matters. As in the previous example, the business owner may very well hear a judge ask the well-reasoned question: “If you haven’t treated these items as trade secrets, why should I?”

It’s a good question. You may want to take steps now to make sure it’s one you never have to answer.

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