Planning for Success in 2019
Plan for the Unexpected
to Safeguard Your Success
Manage Legal Risks to
Maintain Business Momentum.
Success never travels alone. It’s always in the company of surprise. If you are Planning for Success in 2019, you should invest some time in planning for the accompanying surprises.
I’ve been a business attorney for more than 20 years and have seen how easy it is for a soaring entrepreneur to come crashing down because of a legal matter that could have either been avoided in the first place or properly responded to in a way that makes it manageable, less disruptive and less costly.
The threats come from inefficiencies, miscommunication, bad contracts, issues with partners, and even receivable problems. There are really too many to list. While every business is different, they share many of the same problems.
When these problems surface with the sudden shock of a deep pothole, you need to take action. You can foolishly ignore them, but they won’t go away. Instead, they will likely get worse and cause greater disruptions and costs.
So, as you strive toward making 2019 a banner year, I recommend that your planning include a legal inventory of your business to identify areas of risk.
With all my clients, I go through a custom checklist. If it’s a new client, I do a deep dive to understand the nature of the business, the clients, vendors, employment issues, and practices and processes. For existing clients, we discuss what in the past year has changed in their business, such as a different customer mix, vendor relations, and plans for growth.
A businesses legal structure or entity should be reviewed in case circumstances have changed.
It’s important to have an entity that fits you. Is an LLC still the best option? Should you consider an S corp? Factors in choosing and evaluating your entity include tax implications and the liability shield.
All businesses experience risks. Taking risk allows the benefit of profit. But it must be controlled. The key value of your entity is the liability protection it affords. Tax matters and flexibility of management are other key factors. If someone sues the business and it has no money or assets to be recovered, they can’t come after your personal assets. If you are an unregistered sole proprietor, you have no protection. You and the business are one and the same. Why suffer that risk?
The liability shield is critical for every business. Let’s say you start a horseshoe making business and the forge blows up and destroys the neighborhood. With the liability protection from your entity, you can only lose what you’ve put into the business, not your personal assets.
If the state didn’t have such protections, no one would ever risk starting a business.
It is the same for a general partnership that is loosely formed. An example of this would be two handymen working on a project together. They are considered partners in the legal and liability sense that they share liability for debts, and lawsuits. Even if they don’t consider themselves “partners,” both will get sued, even if only one of them caused the issue.
As mentioned, a key consideration is the tax implications of the entity choice and how the money will flow to owners, and how must tax will be owed. A C corp has to pay taxes twice. Once on what the business earned and then again when the income passes to the shareholders.
If you have an LLC, you are taxed only at the personal level. An S corp provides the same and may allow you saving on self-employment tax.
Evaluating the best tax implication is best done with a CPA. My role is to spot the legal issues and make sure it is set up right.
If you have big plans to expand your business, go nationwide or get investors, your entity choice will be important. An LLC may not be the best way to go. Venture capitalists might want you to incorporate in Delaware. They don’t like LLCs because every state has different LLC laws.
Every business needs an exit plan. How will you get out of your business? What if there are multiple owners? What if you want to get rid of one of them?
Address all the scenarios at the beginning and put it into a written agreement. If you didn’t do it at the start, do it now. An agreement reins in the idiocy that often happens with multiple owners. It might be thought of similarly to a prenuptial agreement. Having a clear agreement greatly reduces or eliminates the risk of resolving any issues that might other wise lead to court.
These operating and shareholder agreements, including a buy-sell agreement, spell it all out. If someone wants out, dies or becomes disabled, its guides what will happen and can specify how the value of the business is determined.
Document Review and Analysis
You should review all of your agreements and forms to make sure they are effective for you and provide the best legal protections for your situation. Customer-facing agreements are meant to protect you. They need to be current and legal in Minnesota (Don’t borrow forms from online, unless you wish to borrow trouble with them).
If you have a cabinet making business, for instance, your forms should tell the customer how much needs to be paid upfront, the total cost, payment terms, any quality guarantees, how complaints and refunds are handled.
Many problems (Surprises) that sidetrack businesses are rooted in miscommunication where the customer didn’t know what to expect and felt like they were being taken advantage of.
A good example is a contractor who provides a bid estimating the cost of a project. You need to have price and scope clearly defined and spelled out. And you certainly need language addressing what happens if you open a wall and find a major problem that explodes the estimate.
Don’t underestimate the importance of the language used in your documents and contracts. You want the reader to understand the terms and conditions, but you also want to use the right legalese that has a very specific meaning to lawyers and judges, which will help you win in court.
I work with my clients to identify problems that surface and then address them. Based on my experience working with a range of businesses, I make sure the right language is used to end those problems.
If you have a service-based business, it might be a good idea to have the most important information such as terms, costs, and deliverables. in the document given to customers. They can be directed to your website for the more lengthy and dense language, such as the process for resolving complaints.
Every business has some type of intellectual property, but not all of it has value that can or should be protected with trademarks, copyrights or patents. It’s an important discussion you should have with your attorney. Protect what you have built up. There is no reason for someone else to take advantage of the value you have created.
You should have a review of all your intellectual property to see if it needs protection. Intellectual property includes technology, trade secrets, apps you are creating, trademark phrases, software, inventions, artwork, the name of your business.
And if you have something valuable that you aren’t using, you should explore licensing it to someone else to use for a fee. Make your assets work for you.
Nothing challenges a business as much as cash flow. To control your accounts receivable you need people paying on time.
To do that you need the terms of payment in your contracts: What to pay, when it due, how much interest to charge, and reimbursement of attorney or collection fees. You can only collect the fees if it is stated in the contracts.
Put a collections plan in place that includes each step in your process. When to notify the customer they are past due. How many letters requesting payment are sent before turning it over to a collections company or an attorney.
Depending on the amount you need to collect, an attorney can be a great help. A letter from an attorney is a powerful thing. It tells them there is a new sheriff in town. However, it may not be worth pursuing the matter legally if the amount is less than $1,000.
Plan on reducing your legal risks by talking to your attorney more. This may increase your profits in the long run. Have a legal inventory done. Have a system in place for dealing with vendors and customers. It should be fair and have clear terms.
Remember that most things work out. Most people don’t get sued. But if you want more success and reduced risks, you need to take charge by using all the methods at your disposal.
–NBM Business Advisor