The beginning of the year is a great time to stop and evaluate the operation of your business. I know a HVAC guy who always says that 50% or more of the problems he sees are related to the lack of maintenance. In many respects the same can be said for legal issues related to a business. The failure to pay attention to the legal details of any business operation can lead to some very expensive “repairs.” As you begin the new year, review the following list to make sure you don’t neglect important legal “maintenance.”
1. Are your annual reports up to date?
If you are operating your business as a corporation or limited liability company in the Commonwealth you are required to file an annual report. The annual report for a corporation is due on the 15th day of the third month following the close of the accounting year for your company. If you have a December 31 year end – the annual report is due on March 15. You should make sure this report is filed each year. You should also watch out for scams — see Corporate Annual Reports: Don’t Be Deceived!
If you operate a limited liability company your annual report is due each year on the date your Certificate of Organization was filed with the Secretary of State’s office. For example, if you filed your certificate of organization on December 10, then your annual report for the LLC is due on December 10 of each year.
2. Are your corporate documents in order?
Do you know if your corporate documents are organized and up to date? Do you know where your minute book is located? (If you don’t know what a minute book is then you should schedule a consultation with your attorney as soon as possible.) If you had a change in ownership (e.g. did your co-owner leave the company or did a new person buy into your company) – do your corporate stock records reflect this change? Do you have minutes of your annual meetings or minutes which approve major activities over the past year? These are just a few of the items you should review to make sure your corporate records are both current and accurate.
3. Are there any lurking employment issues?
If there are others working in your business do you classify them as employees or do you treat them as independent contractors? The classification of an individual as an independent contractor instead of an employee is an area which has generated a fair amount of controversy over the past few years. If you treat an employee as an independent contractor and are audited by the Commonwealth, you could face significant back tax liability and fines if the Commonwealth asserts that the individual should be classified as an employee. If you do classify someone as an independent contractor you should make sure that your actions and company records are consistent with this classification so you are in a stronger position to withstand an audit over employee/independent contractor classification. If you don’t know what these items are – talk to your attorney.
In addition to the employee/independent contractor issue, do your key employees have non-disclosure or non-compete agreements with your company? If not, do you think they are needed? What would happen if your top salesperson quit tomorrow and went to work for your biggest competitor? A non-compete agreement could help protect you if this were to happen.
4. Have you updated your customer agreements? Do you have one?
If you have an agreement with your customers now is a good time to review the agreement to make sure it addresses all of your key concerns. Have you had issues with any customers this past year? If so, are there terms in your agreement which can help address and hopefully prevent these issues from recurring? Did you change your business operations this past year? If you did, do these changes require you to update your customer agreement? You may have an agreement that is working very well – and if that is the case – great. However, it is always a good idea to review your agreement or have it reviewed by your attorney to help prevent potential problems.
5. Does your current business structure still make sense?
How do you operate your business? Are you a corporation, a limited liability company, a limited partnership, a general partnership or a sole proprietor? If you have not thought about how your business is structured within the last few years it is good to make sure your organizational structure provides you with the protection you need. If you have concerns about personal liability and are operating your business as a sole proprietorship or a general partnership a change may be a very good idea.
6. What will happen to your business if you die this year? Will your business survive?
If you want your business to continue after your death it is very important to have an effective estate plan in place. This is very important if you have a child working in the business and want that child to continue with operations after you are no longer around. If you have other children who do not work in the business, it is even more important to have an estate plan in place. Most people want their estates divided evenly among their children but there are many ways to accomplish this. If you have not given any thought about business succession planning and your business is the major asset of your estate, the child running the business may be forced to sell the business just so his or her siblings can receive their fair “share.”
Another issue that I see is how you assign value to the business which should be divided among your heirs. If the child working in the business has spent 20 years working 60+ hour weeks to build up a thriving business with you, should the other siblings get an equal share of the business value which includes the sweat equity contributed by their sibling? These are the kinds of issues that divide families forever – and can be avoided or at least minimized with a good estate plan. The bottom line is that one of the most effective ways to kill a business is to make sure there is no clear plan when you are no longer around.
The above six areas are some of the more important “maintenance” issues you should address to keep your business running smoothly this year. Taking the time to pay attention to the legal “maintenance” issues for your business can help keep it running smooth and avoid those more costly legal “repairs.”