One of the more frequent questions that we get from our new clients is, “how should a small business owner go about protecting their business interests?” In our opinion, it comes down to three basic areas: good business practices, the proper type and amount of insurance and the proper formation and business record maintenance to the business entity selected by the business owner.
Good Business Practices
Although it would seem obvious to many people, you would be shocked to see how frequently small business owners do not employ proper processes and procedures to make certain that the customers are served well and yet the interests of the business are protected. For example, many business owners never take the time to hire an expert properly draft and review business contracts used by the business on a daily basis
Many business owners will resort to using forms that that they have picked up from other competing, similar businesses or they will resort to obtaining a legal forms from the Internet. Both of these approaches frequently result in inaccurate forms and calamitous results.
We had one client that resorted to finding a contract on the Internet in order to save a few thousand dollars in attorney’s fees. Unbeknownst to the business owner, the contract was only suitable for use in the state of Maine. However, since the parties to their particular contract were located in California and the contract was performed California, the terms of this particular contract applied the wrong state law.
When it came to the lawsuit, the court determined that since the business owner was the drafter of the agreement, a dispute in the interpretation of the law would be found against the business owner rather than the customer causing the small business tens of thousands dollars in losses.
What Could the Business Owner have done Better?
The answer is to retain an expert in the area of reviewing and drafting business contracts. Yes, attorneys are expensive. However, people frequently forget to take into consideration the fact that an attorney is highly educated, trained and has spent thousands of hours of practice understanding how to draft and negotiate the intricacies of the contract. For small investment by business owner, they can hire an expert attorney to guide them in the creation and use of contracts that would best serve the business owner.
Get the Proper Insurance
One of the first pieces of advice that we give our clients is to make certain that they have the proper type and amount of insurance for their particular type of business. A corporate structure is not a replacement for insurance. Neither is insurance a replacement for proper corporate structure. Smart business owners use both.
All businesses are different. All risks that business owners face are different. The key to finding the right kind of insurance is to form a relationship with a skilled commercial business insurance broker. Where do you find such a person?
Probably the best place to go for a referral of that type is to your small business attorney. In our office, we deal with hundreds and hundreds of small businesses. We consequently have the opportunity to be introduced to a wide variety of insurance brokers who, in turn, have a wide variety of expertise in many different kinds of business specialties. By utilizing our experience of what has been successful for other clients, we can guide our clients to the right insurance broker who can then educate and guide them through the process of purchasing the right kind of insurance for their small business.
Proper Creation and Maintenance of Corporate Records
Another very common mistake that we see with the owners of small businesses is that they cut corners when it comes to the proper selection and creation of a business entity. All too often we see small business owners resorting to the internet hoping to save a few thousand dollars when it comes to the creation of their business entity. For example, they will refer to one of the more popular websites such as LegalDoom.
Our best advice, whether clients retain our offices are the services of another experienced business attorney, is not to trip over dollars to pick up pennies.
“Tip: do not trip over dollars to pick up pennies”
The first step in the process of the proper creation of a business entity is to make certain that you are selecting the right kind of entity for your business enterprise. One of the most common questions we get is should I form an LLC or should I form a Corporation? It’s kind of like asking should I use a screwdriver or a hammer to complete a do-it-yourself repair project at my home. The answer is it depends.
The reality is that every situation has its own set of considerations. A business owner must take the time to sit down with an experienced business attorney to review the exact nature of the business, people who are involved, risks of the day business, growth plans for the business, exit plans for the business to come up with the pros and cons for the use of a corporation or limited liability company.
In our office, we go through very distinct process wherein we go through all of the different aspects of the potential business weighing the pros and cons of the different kinds of business entities to settle on the one that is the best for our particular client.
Once we have the business entity selected, we then go through the process of making sure that all of the forms necessary to meet all of the legal requirements for corporate formalities have been met. There are many different forms that must be created and properly completed to establish the business from a legal standpoint.
Some of the forms are internal documents and other forms are created to be submitted to various governmental entities. All of the documents, both internal and those met for governmental entities, work together as one cohesive unit to establish the business entity and put in place the all-important “corporate veil”.
Why are we concerned about a Corporate Veil?
The purpose of having a properly for business entities to protect your personal assets in the event of a business catastrophe. No corporate veil, no asset protection.
“No corporate veil, no asset protection”
The Right type of Entity for Their Business
The clients that come to our office have determined that their time is far more effective in planning, developing and running their business that is learning how to be an attorney. They present us with the challenge of working with them to select and create the right type of entity for their business. Once the entity selection is made, we will then create all of the documents for them and present them with a corporation or limited liability company in a “turnkey” format with directions on what steps must occur next and unlimited guidance from us as relates to the documents we have created.
The last piece of the puzzle is proper maintenance of the business entity. In order to properly maintain the “corporate formalities” of a corporation, certain legal steps must be taken within the corporation and the creation of certain legal documents memorializing the steps taken by the corporation must be prepared. This task seems to be overwhelming to many small businesses and consequently they just never get around to creating the required documentation.
The result of the lack of attention to corporate formalities only becomes a problem when the documentation is requested by a governmental entity, or worse, a lawsuit strikes. By that time, it is way too late to simply type up documents.
The Corporate Records Program
In order to make things much simpler for our clients, we have created an annual corporate record program where, for small fixed fee, we take care of all of this work for our small business clients.
Take Action – Protect Your Business Interests
If you need any guidance in how to best protect your business interests, choose the right kind of insurance broker, make a business entity selection of corporation or limited liability company and properly maintain the corporate records associated with the entity, please give us a call at 714-634-4838.