As we head into the spooky season, here are some tricks and treats to help small business owners from becoming a horror story.
Separate Your Goodies
Most small businesses should create a business entity that will protect owners from liability. Creating a business entity keeps your business assets separate from your personal assets, so if the business becomes liable, any amounts owed is due from the business, not your personal assets. The most common types of entities for businesses are corporations, including C corporations and S corporations, limited liability companies, and partnerships. All of these entity options provide liability protection, but each has its own particular tax treatment, owner/investor requirements, and other characteristics. To choose the right business entity for your company, you need to consider your particular circumstances, current plans, and future goals.
Agree in Advance Before the Party Starts
If your business has more than one owner, all of the owners should enter into an agreement that outlines each person’s rights, responsibilities, and how the business will be operated and ended. Shareholder agreements, buy-sell agreements, operating agreements, partnership agreements, or transfer restriction agreements all share the common purpose of establishing owners’ rights and restrictions such as management and decision-making powers, restriction on transferring the ownership of the business, and spelling out what will happen in the event of a death, bankruptcy,or marriage, domestic partnership or divorce of an owner. The owners should discuss and agree on a framework and procedure to handle events if these circumstances arise. Without such agreements in place, best friends, family members, spouses, and formerly close relationships sometimes are destroyed because business owners did not take time at the outset to consider and memorialize their common goals and then their only remedy is to sue each other if they can’t work out a solution.
Be Careful When Taking Candy From Strangers
When a business accepts investments from third parties, whether via loans or equity investments, make sure that the business fully understands the ramifications of such investment. The terms and conditions of such investment can vary greatly and appreciating the pros and cons of such terms can lead to better decisions when negotiating taking on investment money. When a company issues evidence of ownership (e.g. stock, LLC membership units or interests, or partnership shares), the company is issuing a security. All “issuing” companies are subject to federal and state securities laws that have complex registration requirements. The good news is that various exemptions are available to companies, provided certain requirements are met. So, whether you are raising money from family or friends, or you are courting investors, in all cases you should consult an attorney who understands securities laws to avoid unwittingly running afoul of filing and registration requirements.
Read the Labels
Small business owners are constantly multi-tasking, stretched and pulled in so many directions that simple items can easily get pushed aside. As busy as you are, it is crucial that you create and maintain records that track your business operations. Best practices include creating and maintaining minutes and consents from business meetings, documenting any loans that you or other owners make to or from the company, and most importantly, READING and organizing all contracts. Taking the time to perform these tasks as you do them is much easier than doing them after the fact.
Learn about How to Avoid Becoming a Horror Story—Tricks for Small Business Owners at NCET’s Biz Bite luncheon on Sept. 28. NCET is a member-supported nonprofit organization that produces networking events to help individuals and businesses explore and use technology. Register for the event and get more info at www.NCETbite.org
Fritz Battcher is a corporate attorney and partner at Holland & Hart in Reno (https://www.hollandhart.com/fbattcher). He has counseled hundreds of businesses from formation through exit events.