As businesses evolve, their legal needs change. Proactively addressing these issues is an important part of building a successful business. Here are some legal planning items you should review.
Exit planning: what you do now matters.
Most business owners eventually sell their businesses. Frequently, a business is the business owner’s most valuable asset, and the sales proceeds from the sale of the business will be a significant part of his or her retirement savings.
- Incorporate provisions in your contracts that will facilitate the sale of your business. Review the renewal and assignment provisions in your agreements. Is your lease assignable?
- It takes time to prepare your business for sale. You can alleviate some of this work by planning ahead. Document and periodically update policies and procedures for running your business.
Have you outgrown your business structure?
Many small businesses begin as a sole proprietorship (one owner) or general partnership (multiple owners), but then outgrow these basic business structures. You may decide that it’s time to incorporate or form a limited liability company (LLC) in order to protect your personal assets and enjoy added flexibility and potential savings on your taxes. Banks, investors and customers prefer working with an entity rather than an individual, and in most cases, you will get more value for your business when you sell it.
Do you need to add partners?
Maybe it’s time to add another owner in order to raise additional funds or to help manage the business. Be sure the partner is a good fit and someone you can work with. Remember, it can be very expensive and complicated to unwind the decision to add a partner.
Define the rights and obligations of owners.
It can be very disruptive to a business when the owners are engaged in an internal dispute among themselves. To save time, money and misunderstandings, business owners should adopt agreements (such as a Company Agreement or Bylaws) that govern their rights and obligations.
Adopt a buy-sell agreement.
If you have partners, it is most likely someone will decide to leave the business before the business is terminated. Adopt a buy-sell agreement specifying how the remaining owners or the business will buy out an owner who decides to leave. The buy-sell agreement should describe how the business will be valued when someone leaves and the terms for paying the purchase price.
Keep complete records
Be sure your company's organizational documents are in order. Document major company transactions, such as loans, leases, purchases and agreements. Proper documentation of major transactions increases your ability to get the best price for your business when you decide to sell it.
Relocating and expanding.
If you have moved to another state, you may need to relocate your business to that state as well. If you are doing business in another state, you may need to register as a foreign entity in that state.
Terminate inactive ventures.
If you have a business venture that is no longer active, you should officially close it. There are specific steps you need to go through to dissolve an LLC or a Corporation. Be sure to terminate any associated license and permits. Otherwise, you are still required to file annual reports and pay annual taxes and fees for your business.
Protect your business’s intellectual property
Intellectual property can be a valuable company asset.
- Employee and independent contractor agreements should specify that any work product they develop is owned by the company.
- Adopt policies protecting your confidential information. Require employees and independent contractors to sign confidentiality agreements.
- Trademark your business name.
- Independent contractors and employees.
Independent contractors and employees.
Determine whether individuals providing services to your business are independent contractors or employees. Your business is taking on a huge risk of possible liability for significant fines and penalties if these individuals are improperly characterized as independent contractors.
When you enter into or renew a lease, be sure to review the provisions concerning subletting or assignment so you have options if your business expands or contracts, or if you sell your business. Understand your obligations under the lease, including how rent is calculated and other amounts you owe, the lease term and options for renewal, permitted uses, how repairs and maintenance will be handled, whether you can make improvements, dedicated parking spaces, signage restrictions, insurance requirements, personal guarantees, and termination provisions.
Litigation is very costly and distracting to running your business. Try to anticipate possible litigious issues and address them before they happen. Your agreements must be in writing and give your business flexibility and protection. At a minimum, your contracts should (i) clearly describe the services or products your business is providing, (ii) address any issues that frequently come up in your business, (iii) have provisions for terminating the agreement, (iv) specify how disputes will be resolved, and (iv) ensure that your business will be paid.
Prepare a will.
All business owners should have a will.
Business owners should consult with their legal advisers for interpretation of specific requirements concerning their agreements. For more information on these and other business legal matters, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or firstname.lastname@example.org.