Owning a small business can be filled with blessings and curses. The blessings of business ownership revolve around having control of your source of income and being able to build equity for larger, future personal and family goals. The curses range from people mistakenly thinking you can work (or not work) whenever you want and knowing that much of what may happen inside and outside your business can have significant legal consequences for you and/or your business.
This article addresses the key questions you should ask yourself annually to ensure that the positives always outweigh the negatives and that you stay on track to maximize your company’s profit and minimize the negative legal consequences that can arise from owning a business.
Is the legal structure of my business appropriate?
The legal structure of your business — sole proprietorship, partnership, corporation of Limited Liability Corporation (LLC) — is fundamentally important, as being sued is always a possibility. After all, there are over 1.3 million attorneys in the USA, many of whom would be all too happy to sue your company and go after not just your business assets, but your personal assets too. Therefore, it’s important that the structure of your business provide you with maximum protection.
Structuring your small business as a Limited Liability Corporation (LLC) or a Limited Partnership offers the most lawsuit protection. Operating it as a sole proprietorship or a general partnership provides the least protection.
Don’t choose a business structure on your own. Always consult with an experienced business attorney and a CPA in your state. These professionals will help you ensure that your business structure protects you to the fullest extent under the law.
Am I properly insured?
Nobody likes spending money on insurance because it often seems like insurance companies are interested in collecting premiums, not paying claims. However, it’s critical that your business have the appropriate types and amounts of liability insurance. If you don’t and you are sued, your entire business could be at risk, and in some situations, your personal assets could be at risk too.
The types of insurance to consider include: vehicle insurance if your company owns cars and/or trucks; premise liability insurance should someone get injured while visiting your place of business; and workers compensation insurance which minimizes your risk if one of your employees is injured on the job. You may also want to purchase insurance to protect you from sexual harassment claims, and other personal types of liabilities.
Liability insurance is your first line of defense against a lawsuit. Make sure your defenses are strong.
Do I have a buy-sell agreement with my partner?
If you have a business partner, it’s important to ask yourself, “What would happen to the company if my partner couldn’t work because of a serious illness, a disability, or even death?
Having a well-drafted buy-sell agreement is a good way to protect your business if one of these things happens, regardless of whether your company is a corporation, LLC, limited partnership or general partnership. The agreement should lay out who will inherit your deceased partner’s share of the company and require that the deceased’s family members sell you the part of the company they inherited from the deceased.
A well-drawn agreement should also address situations where one of the owners becomes unable to work due to illness or disability. And disability insurance can be a wise purchase here because it can be used to replace the incapacitated owner’s income. In addition, a buy-sell agreement can determine what will happen if you or your partner get divorced and the ex-spouse wants to assume ownership of the other owner’s share of your company.
Finally, a buy-sell can include a drag-along clause as well as a tag-along clause. A drag-along clause requires a junior partner (an owner who owns less than half of the company) to sell out if the majority partner wants to dispose of their interest in the company in a buy-out from a larger firm. Similarly, a tag-along clause allows a junior partner to require that they be bought out along with the majority owners if you sell your business so that they don’t end-up with a new partner they may not like or want to be in business with.
Is my intellectual property protected?
Your intellectual property (IP) is one of your business’ most valuable assets. It may include things like your business’ brand name, logo, original creative works, and inventions. It’s crucial therefore, that you take steps to ensure that others do not use your IP without your permission. For example, as appropriate, obtain copyrights, patents and/or registered trademark through the U.S. Patent and Trademark Office. Doing this will safeguard your business’ brand and help it maintain a competitive edge.
Do I have the right contracts in place?
Well-drafted contracts are the backbone of any business transaction. They can include agreements with customers and vendors, non-disclosure agreements (NDAs), leases, employment contracts, and independent contractor agreements. Contracts are essential to protecting your business interests and avoiding, as well as resolving, potentially expensive misunderstandings or disputes.
Never draft contracts yourself. Hire an experienced business attorney to do this for you. The saying “There is nothing more expensive than a do-it-yourself lawyer,” is especially true when it comes to contracts.
As the world becomes more complex, it is also becoming more litigious. Therefore, it’s critical to the success of your business, not to mention your peace of mind, that you do what you can to avoid expensive and sometimes debilitating lawsuits and other conflicts. Responding appropriately to the five questions outlined in this article will help you ensure that being a business owner provides you with far more positives than negatives.
Build your foundation with Nav Prime
Options for new businesses are often limited. The first years focus on building your profile and progressing.
Brad Wiewel
Brad Wiewel is the founder and owner of The Wiewel Law Firm, which offers services in the areas of estate planning, probate and asset protection planning. He is board-certified in estate planning and probate law by the Texas Board of Legal Specialization.