Even small, simple operations have plenty of moving parts. Use these ten key points to keep your company running smoothly, protect your assets, and avoid litigation. The Must-Have. Don’t go into business with others unless you have an Owners’ Agreement. You can’t see the future, and you can’t be certain that you and your business partners (or their spouses or heirs) will always agree on everything. Why So Formal? Company formalities are important to limiting your personal liability for the company’s obligations. Have separate company bank accounts, separate company financial records, separate company e-mail addresses, and whatever else needed to clearly separate the company’s life from your personal life. If you don’t respect this separation, the courts might not either. This Time, It’s Personal. Lenders and financing companies almost always require the owners of a closely held business to sign personal guarantees. This means they can sue the company, the owners, or both. Do what you can to limit personal guarantees. If you leave the company, understand what happens to your personal guarantees (and try to terminate them). Get Secure. Unless you get paid in full at the time goods or services are delivered, get security for future payments. Security might take the form of an escrow deposit, a personal guarantee, a bank letter of credit, or a pledge of the purchased goods or some other collateral. Whatever the security, have a written agreement that clearly states your rights in case of nonpayment. Business Straight-Jackets. In many cases, restrictive agreements are enforceable (provided they are reasonable in duration and geography). Know what restrictive agreements apply to you and the people you hire. Use restrictive agreements yourself to ensure that the person you hire today isn’t competing against you tomorrow. Protect the Good Stuff. You don’t have to be the latest dot-something tech company to have valuable intellectual property. IP may include your name, slogans, website, plans, and just about anything else you (or someone else) has thought of. If someone else develops your IP (that web designer, for instance), make sure the creator assigns all the rights to you. What’s in a Name? Not much, when it comes to “independent contractors” or “employees.” Whether a person is an employee (which requires tax withholding and other administrative burdens) or an independent contractor (which doesn’t) depends on what he does and how he does it. If you can tell a person how, when, and where to do her job, she’s probably an employee. The Tax Man Cometh. Collecting taxes and delivering them to the taxing authority is a big deal. Employment taxes you withheld and sales taxes you collected are not yours, they belong to the government. The government will get them, with penalties and interest (or worse!) if they’re late. Fresh Stock for Sale! Selling equity (stock, units) in your company may seem like a great way to raise capital. It’s also a great way to have financial investors and security regulators looking over your shoulder. Don’t sell equity if there’s a better way, and there’s probably a better way. Here’s the Catch. Even if you have the right written agreements, it costs money to enforce them. Your agreements might provide that legal fees and costs go to the prevailing party (most of them should), but you won’t get that until the end (and only if you go to court). Litigation is always an expensive last resort.
Unless you’re a sole proprietor, you need an Owners Agreement to guide your company through daily operations and special situations. Unless You’re Microsoft, You Need an Owners Agreement. Having an Owners Agreement is important for every non-public company with more than one owner. Owners Agreements go by different names—Shareholders Agreement or Buy-Sell Agreement for a corporation, Operating Agreement for an LLC, Partnership Agreement for a partnership. Whatever it’s called, it’s essential. “We Already Have Bylaws.” Great, but they are not the same thing. Bylaws deal with the internal management of a corporation and the relationship between shareholders, directors, and officers. Owners Agreements have a different focus: the relationship among shareholders. The Owners Agreement is much more important for a non-public corporation. LLCs and partnerships don’t even have bylaws. Protection From Unknown Unknowns. What happens to the business when personal tragedy strikes one of its owners? Personal liability, bankruptcy, divorce, disability, death—any one of these events in the life of an actively involved owner can cripple the business unless precautions are taken in advance. Those precautions belong in an Owners Agreement. Know Your Partners. You trust your business partners, but how about their creditors or ex-spouses? An Owners Agreement is needed to ensure that the ownership interests (stock, membership units, partnership interests, whatever they’re called) do not wind up in the wrong hands. Deadlock! You and your business partners are reasonable people, but sooner or later even reasonable people disagree. This isn’t a problem for the U.S. government or large corporations where the voting process (usually) ensures a winner, but what if there are only two owners of the company (or four, six or eight, etc.)? The Owners Agreement can include more creative solutions to deal with deadlocks. Competition—Good for the Market, Bad for your Business. Having put time and resources into building the business, the last thing you want is for your business partner to compete against the business. On the other hand, you might not care if your business partner has a side business. What’s allowed and what’s not in the way of extracurricular business activities should be addressed in the Owners Agreement. Like Old Fish. If an employee-owner quits or is fired, the last thing anyone needs is for her to hang around. If she keeps her ownership interest in the company, that’s exactly what can happen. The Owners Agreement should require a buy-out. Not the Time for Haggling. The Owners Agreement should address the purchase price and payment terms for the buy-out of an owner’s interest, whatever the triggering event. Unless you keep loads of cash lying around—“just in case”—you or your business might suffer from an unexpected obligation (or opportunity) to cash out an owner. By the way, how much is that ownership interest worth anyway? Bells and Whistles. Sometimes the cookie-cutter, default rules of a corporation are just fine, but often you and your business partners want things your way. LLCs or partnerships are especially flexible and allow customization. All this customization must be provided in the Owners Agreement. They Grow Up So Fast. As your company grows, your Owners Agreement may not fit so well (like my children’s clothes). Every few years, it’s important to review and update the Owners Agreement to make sure that it continues to fit your company.