Whether you are planning to launch a new business or have operated a business for years, here are four things to consider in order to protect your investment:
Operating Agreements/Employment Agreements
Business owners may be reluctant to confront fellow partners or high-level employees when someone isn’t contributing. Often this hesitation stems from relationships that predate the business, such as family ties, friendships or prior acquaintances. Operating agreements that clearly define each person’s job role will help resolve disputes before they become too large. Similarly, employment agreements (or agreements that govern employees of the business and not the necessarily the owners) are important especially when family members are the employees of the business. Tension may arise between family members who perceive another family member isn’t doing his or her part. Again, the key is to have agreements that clearly define what each person’s job role is and what duties he or she is expected to perform.
Owners of closely held businesses (like family businesses) may co-mingle personal funds with operating funds for a variety of reasons. In general, co-mingling funds is not recommended. The law forbids some kinds of businesses from co-mingling funds. While the practice may not be per se illegal in your particular case, co-mingling funds may violate other agreements that your business undertakes. For example, many master finance agreements between dealers and lenders clearly prohibit co-mingling of personal and business funds. These contracts often define co-mingling as a condition triggering default and possible damages. Even if you have not entered into these kinds of agreements, segregating funds can protect you from losses arising from the business’s liability. Additionally, many businesses will also choose a legal form such as a Corporation or Limited Liability Company (“LLC”) to further shield owners against liabilities arising from the operation of the business.
If you operate a business that is licensed by your local municipality or by the state, it is crucial to make sure that your licenses are current. Your licenses must reflect the proper ownership structure of your business. Failure to correct discrepancies in your licenses may trigger revocation or other sanctions by the respective licensing board. If you sell new vehicles, make sure your sales and service agreements are correct. Often it is much easier to modify licenses and franchise agreements before a crisis arises, like the death of an owner.
Disagreements over the operation of the business often occur upon the death of an owner or when an owner wishes to leave to pursue other opportunities. Businesses that are operated as sole proprietorships “die” when the owner passes. If you operate under a LLC or some types of partnerships, the business entity may cease to exist after a set period of time or with the death or departure of a member or partner. If you wish for your business to survive your passing, you will need to formulate an effective succession plan that addresses the future operation and ownership of the business. Your succession plan should also include your own “exit plan” on how to maximize your return on your investment if you wish to leave the business.
We can help make sure that your business is protected by these and other solutions. Call us at 631-224-7000.