5 COMMON OVERSIGHTS SMALL BUSINESSES MAKE
5 COMMON OVERSIGHTS SMALL BUSINESSES MAKE
When starting a new business, the “Things to Do” list seems endless. Transforming the vision in your head from an idea to a fully functional business entails many moving parts. During the first-year growing pains, new business owners (especially sole proprietors) find it necessary to tackle first-things-first. So often, some key tasks that seem less important get shuffled downward or even eliminated from the “Must-Do” list. Most companies don’t purposefully neglect these high-priority items. However, over time these priorities become forgotten and never heard of again until something hits the fan.
Passion and excitement about launching a new business or product line is great. However, don’t allow enthusiasm and misplaced priorities cause you to miss 5 key tasks that should be checked-off your “Must-Do” list early in the business development process. If left unchecked, these oversights can leave you and your company vulnerable to unnecessary legal and financial misfortunes.
1. Business Structure
When choosing an appropriate business structure, you’re really deciding which entity best protects you and your family, your investments, and business interests now and into the future. There are several legal and financial implications associated with each business structure. For instance, selecting the right structure can enhance your ability to acquire outside investors; create smooth transitions between leadership and ownership; and protect your personal assets.
There are a number of entity options from which to consider. Some of the more common entity structures include a Sole Proprietorship, Limited Liability Company, Partnership, C-Corporation and S Corporation. If you are starting a new business or you are reconsidering a previously selected business structure, it’s important to understand the key similarities and differences between each entity and how federal, state and local laws affect them. For example, both an LLC and S-Corp afford your personal assets protection if your company is sued. However, S-Corps have better tax advantages than LLCs.
Find more information about the key characteristics of business structures and their interplay in two of our Business Formation articles — LLC vs. S-Corp—Which One is Best for My Business?; Is 2017 the Year of the C-Corp Under Trump’s Tax Plan?. These articles will help you understand the basics to selecting the right entity structure for your business.
2. Shareholders Agreement
A shareholder is an individual, group or organization that owns one or more shares in a company. Shareholders partner with you to ensure the success of your company. As a shareholder, they’re entitled to a portion of your profits. In some cases, you may even grant them voting privileges.
Having a solid Shareholders Agreement in place accomplishes at least four essentials:
— Outlines shareholders’ commitments and responsibilities.
— Provides fundamental guidelines and procedures that ensure shareholders that your business will be consistently operational.
— Reduces shareholder conflicts when one leaves, divorces, or dies.
— Helps avoid confusion.
Naturally, there are moments when some or all shareholders will not agree with a major business decision. Therefore, having a written agreement in place can protect you and your business from the actions of a disgruntled player who may choose to impede the progress of the majority of shareholders. Your legal advisor can help you draft an agreement that will keep your business moving forward and keep you out of court. The less money you spend litigating something that has already been agreed upon, the more time and money you can spend nurturing and expanding your business.
3. Outsider Investor Agreement
New businesses need money. When borrowing from family and friends or acquiring a bank loan are not viable options, business owners may seek outsider investor funding. When paired with the right investor, some business owners have found themselves wildly successful because the investor’s funds allowed them to jump-start their product line; purchase more inventory or equipment; and hire additional hands to help. In other cases, business owners have found themselves food for sharks.
Understandably, all outside investors want to protect their investments and want to ensure that the business is positioned to maximize profits. When you win, they win. Generally, investors will require some degree of accountability and responsibility on your part. Therefore, along with the check they place in your hand, they’ll also likely impose some conditions on how those funds are used and perhaps expect some overall decision-rights.
If you’ve ever watched the show “The Profit,” with millionaire investor Marcus Lemonis, you know that having an investor can be great for a business. However, here’s where having an Outsider Investor Agreement becomes important:
— What happens when you don’t agree with your investors?
— Are you protected if your company does not make a profit within the time frame you and your investors agreed upon?
— Are you able to take on other investors?
— What if your investors decide to pull the plug mid-launch?
An Outsider Investor Agreement principally defines the relationship between the business and the investor, and it outlines the structure of the investment. Whether the investment is a traditional equity investment or a debt security with warranties, this agreement will establish parameters around the investor’s relationship and involvement with the business. It will also set limits on their ability to make certain business decisions.
A well-crafted agreement can help you avoid losing your voice, and help you maintain control over the decisions you feel are most important to your business’ success.
4. Human Resources Guidelines
There is no getting around establishing Human Resource (HR) guidelines for any company. Whether you have a team of 2, 20, 200, or 2000, all businesses need defined guidelines that establish business culture and norms. More importantly, you need HR guidelines to maintain compliance with employment laws and regulations.
Many issues can and will arise in the workplace; therefore, covering your assets with documentation is a MUST. You can take the first step to protecting your small business by creating an Employee Handbook that documents essential company policies and guidelines related to your business culture and operations.
Employee Handbooks and company policies are invaluable tools that should be treated as living documents that evolve as your business evolves. When properly written, these documents provide clarity to employees regarding their boundaries, rights and obligations in the workplace. In addition, they give you ammunition that you can use and point to as evidence if an employment disagreement or lawsuit ever arises.
Getting a handle on your human resources can be complicated, but it should never be taken lightly. Whether you’re a new or existing business, use my list of key issues to avoid and best practices to understand the fundamentals – 4 HR Issues that Can Harm Your Business.
5. Personal Use of the Internet
You should automatically assume that your employees occasionally visit websites for personal reasons. Employees shop, bank, read sports articles, pay bills, chat, tweet and more while at work. Most companies allow some leeway for personal use of the internet while on-the-clock. However, excessive time spent online costs businesses in terms of productivity, company resources, and ultimately money. Unbridled personal use of company computers can also compromise the safety of company data (e.g., trade secrets, sensitive employee documents, and customer payment information).
Establishing an Internet Usage Policy is one of the primary ways companies safeguard themselves against excessive or abusive internet use. These policies clearly communicate the company’s position and establish expectation on appropriate and inappropriate uses. These policies also put employees on notice that the company has the right to monitor company-provided workspaces (e.g., intranet, internal instant messages, online chat boards) and employee’s online activity while in the workplace (e.g., surfing the web, social media usage)
Social Media usage presents the biggest issue for most companies trying to combat internet over-usage and abuse. Here are some tips on How to Manage Social Media Use in the Workplace and a list of Key Provisions Every Social Media Policy Should Include.
These five are only a few of many preliminary tasks business owners tend to overlook when starting and running a business. You can avoid these costly pitfalls from the onset if you plan ahead and seek appropriate guidance. If you’re already 2 or 3+ years into your business, congratulations for your hard work and perseverance! Even if you’re a seasoned-business owner, it’s not too late for you to take some precautionary measures to keep your business moving forward and in a good position for expansion.
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This article is intended to provide you with general information; it does not constitute any type of legal advice. For recommendations related to your specific matter, we encourage you to review our Practice Areas page for additional information and then contact us to discuss your company’s legal needs.