Just like you shouldn’t do business on a handshake, you shouldn’t operate your business on a handshake either. But too many entrepreneurs regularly go into business without any formal documentation. If you have business partners, so-called “silent” investors, or took money from friends and family, I cannot stress enough how important it is to have the terms of these partnerships documented in a formal written agreement. Otherwise, it’s just a dispute waiting to happen.
If I had a dollar for every time a client or prospective client told me that their business partner/best friend/family member would never sue them, I’d be writing this article from a beach in the Caribbean right now.
There are a few critical questions that every company operating agreement* should answer.
The idea of "doing good while doing well" certainly isn't new, but it is increasingly popular in both the business and non-profit worlds. Increasingly, non-profits are developing social enterprises to help the organization become financially sustainable without being as dependent upon the good will of donors. On the other hand, some for-profit businesses are intentionally being established with the mindset that the business's social impact or mission is at least equally as important as earning a profit.
A social enterprise is a business that is both purpose-driven and market-driven. Unlike a typical for-profit business, a social enterprise is not exclusively dedicated to maximizing profits, but unlike a typical non-profit organization, a social enterprise does sell goods or services to raise revenue while addressing a larger societal issue. Social enterprises can range from socially responsible or philanthropic-minded for-profit businesses to revenue-generating arms of traditional non-profit organizations.
How is forming a social enterprise different from establishing other types of business entities? And how should you structure a social enterprise?
As a business attorney, I talk to all kinds of entrepreneurs about both their passions and their struggles. Going out on your own to pursue your passion is scary stuff. (Spoiler alert: The fear never goes away; you just get better at working through it.) So here are five legal tips that that will help every entrepreneur spend more time pursuing their passion and less time worrying.
1. Surround yourself with the right people. I tell every prospective client that a business owner must have a relationship with certain key advisors: your business banker, your accountant, and your business attorney. But you should also surround yourself with like-minded people who have achieved what you’re trying to achieve—other business owners that you respect and trust. These are the people you will most likely turn to for advice and referrals.
You’ve come up with a great business idea, and you’ve read Business Entity 101. You’ve even decided that a corporation is the right form of entity for your business. How do you form one in Ohio? Like most issues, the steps are relatively straightforward; it’s the details you should be most concerned about.
Most, if not all, of the entrepreneurs I speak to are understandably anxious to start doing their “Great Business Idea.” In fact, their passion is why I love doing what I do (and why I became an entrepreneur myself). But that excitement also makes many entrepreneurs dive right in without doing some of the less glamorous, behind the scenes work. And a great example of this is not forming a business entity before launching the business.
Properly forming a business entity can reduce your personal exposure to liabilities of the business, minimize taxes, ensure that business is being conducted efficiently, help you obtain financing for your business, and prevent misunderstandings among the various stakeholders (your business partners, investors, managers, etc.).
So when should you form your business entity? Since the right entity can limit your personal liability, the obvious answer is before you taken on any significant business obligations. Before 1) signing any contracts or leases, 2) entering into any type of agreement with a third party, or 3) raising funds from others, even family and friends, you should have your legal business entity in place. While these types of relationships always start out very friendly, it’s these same relationships that will be the greatest potential source of conflict down the road.
You can protect yourself and your personal assets by understanding the difference between having your business enter into these legal relationships versus you personally entering into these relationships. And the key to doing so is forming a business entity. So what type of entity is right for you—sole proprietorship, partnership, limited liability company, S Corporation, or C Corporation?
Every business will likely need legal help at some point. But no one goes into business because they want to spend all of the business’ money on legal fees. So when do you need a small business attorney?
Forming A Business
Forming a corporation or a limited liability company (LLC) isn’t hard. The Secretary of State has the necessary forms available online. Many of these forms are pretty simple to complete, but you probably need a small business attorney to help you decide which one is right for your business and your circumstances. A small business attorney can make sure your operating agreement or corporate bylaws are appropriate for your unique situation. Even if you don’t file anything with the Secretary of State, if you’re going into business with a partner, you’ve created a partnership. A small business attorney can help you draft a partnership agreement that covers everyone’s’ rights and obligations long before there are any business disputes over who owns what. Finally, if you’re not sure what needs to be done to keep your business entity in good standing with the Secretary of State, you should consult with a small business attorney.
Writing and Reviewing Contracts
Often, entrepreneurs and small business owners think that contracts and other legal documents can just be adapted from a form found online or borrowed from a friend. And while such a document might be a decent starting point, the devil, as they say, is in the details. You need a small business attorney that understands your business to make sure those details are just right—that every I is dotted and every T is crossed. Your small business attorney should write, or a least review, any standard form contracts that your business needs to make sure they are enforceable. A small business attorney can also review any contracts that your business is asked to sign.
If you’re in the business of creating or designing something, you need to discuss with your small business attorney the difference between copyrights, trademarks, and patents and which your business needs. Once you understand these terms, registering for copyright and trademark protection is relatively straight-forward.
Also called exit planning, succession planning is important for any small business with more than one owner. Your succession plan should cover what happens to your co-owners’ interests if they pass away or simply want out of the business. These types of plans are especially important for family-owned businesses where the owners want to keep the business in the family. You need a small business attorney to make sure an appropriate buy-sell agreement is in place.
And if you decide to buy or sale a business, you need a small business attorney to help you negotiate and draft sales agreements, negotiate and draft asset purchase agreements, and conduct the necessary due diligence.
Don’t Wait Until You’re Sued to Hire a Small Business Attorney
Every small business needs a great working relationship with their attorney long before a lawsuit is on the horizon. If you do, you’ll have an attorney that knows the ins and outs of your business and has done everything possible to help you avoid getting sued in the first place. Preventing litigation is always cheaper than resolving a lawsuit.
But if you are sued (or even threatened with a lawsuit), you need to call your small business attorney immediately. While you might think you can settle the dispute on your own, you don’t want to inadvertently admit something that could be used against you later. Litigation also involves complicated procedural issues and deadlines. If you delay in calling your attorney, you could miss an important deadline or foreclose a possible defense. It should go without saying that the same is true for any government investigations.
Even if you decide to take the do-it-yourself route, you should ask a small business attorney to “check your work.” For example, if you wrote your business contracts yourself, an attorney can make sure the contracts include all of the necessary clauses and legalese and will be enforceable. If you form your own business entity, your attorney can review your operating agreement, partnership agreement, or bylaws and suggest areas for improvement. This type of coaching arrangement can save your business money while building a great working relationship with your attorney. As your business grows and your legal questions become more complex, you’ll already have an attorney you’re comfortable with and who knows your business.
Your Time is Valuable
Last, but certainly not least, you need to hire a small business attorney because your time is valuable. An entrepreneur’s to-do list is always a mile long. If you can delegate some of those tasks to someone with more expertise than you, you’ll save yourself time, money, and quite the number of headaches in the long run. There is certainly something to be said for spending your time on the aspects of your business that you love and entrusting the rest to experts who love dealing with that aspect of the business. For example, most of us aren’t in love with filing our taxes each year; instead, we delegate that task to an accountant—those crazy types that love tax season. Working with a small business attorney is similar; if you really loved writing contracts, you probably would have gone to law school instead of pursuing your business idea.
Don’t just take my word for it. Check out these related articles:
· Step 1 in Starting a Small Business: Hire a Lawyer
· Small Business Legal Advice: Hiring an Attorney
In the coming weeks, I’ll be expanding on many of these topics—how to save on legal fees, which business entity to choose, and how to form your corporation or LLC. If you have topics you would like to see covered, leave a comment below. If you have questions about your specific circumstances, contact me today for a free consultation.