I was recently posting to a community for entrepeneurs on Google plus when I asked for suggestions on some things business owners would like to see addressed on my blog. This is the first in a series of posts that will attempt to address the issues they saw as being important.
A question recently posed was, how do business owners protect themselves? While this could be a huge topic that could take numerous posts to fully discuss, I'll try to give some general ideas that could be implemented to offer a certain level of protection.
Make sure that your incorporation documents are in order. As times change and people move in and out of the business, it is possible that there have been several changes in the makeup of the organizational structure of the business. Be sure to keep your information updated with the state, keep your minutes up to date, filing fees, etc.
Speaking of that...you are incorporated in some way, aren't you? Many people get an idea for a business and run with it, starting small and taking baby steps until they seemingly wake up one day only to realize they're in the big leagues. One of the biggest dangers is to be operating a major business without any level of incorporation that would protect you as the owner. A corporation, an LLC, and even an LLP (if you have partners) offer protection through a layer of insulation between you as an individual and your business as a company. Except in certain rare situations, this level of protection can save you and your personal assets from legal action by someone claiming to be injured by your business' actions.
Like the famous shoe company, just do it!
For anyone offering specialized knowledge or work, or for someone essential to the operation of the business, you should consider having them sign an employment agreement. A well drafted employment contract can dictate not just salary and responsibilities, but what steps will be taken when things go sour. Employment contracts can include definitive terms regarding the amount of notice to let someone go, what actions will get the employee terminated, where claims against the employer will be filed (or mediated), non-compete agreements, and the like. In a recent decision here in Massachusetts, a well drafted employment agreement saved a company from a judgment in favor of a terminated employee looking for his annual bonus. They're important and can save you in the long run.
If you are partnered with one or more individuals in the ownership and operation of your business, an agreement setting out the terms of that relationship is crucial. As with official incorporating or otherwise forming a business, the partnership agreement is another bit of planning that often gets overlooked when things start small and grow. When two buddies get a great idea in a dorm room for a business and then just start developing, sometimes it seems like all of a sudden that business is successful and everyone scrambles to figure out their rights and responsibilities. Even worse, when more partners want to be a part of it or when a VC looks to invest, a lack of a well drafted agreement could mean disaster down the line.
Some issues an agreement can address:
- The value of intellectual property added to the business by each member
- The requirements for a member to sell their stock and exit the business prematurely (or even a prohibition on such action)
- Steps to follow to admit new partners
- How to dissolve the business and provide a valuation for each member's ownership share
This isn't anything near an exhaustive list, but just an idea of some of the issues an agreement could address up front which could otherwise become nightmares later.
So what do you do from here? Well, if you're already set up and running but do not have some of the protections in place I mentioned, you may want to contact an attorney...and fast to get things done properly. If you are considering setting up shop then it might be a good idea to consult with an attorney about what you need to get done, and if there are any industry related additional protections you might be able to establish for yourself.
Just think of this as good business strategy and planning.