Behave like a business

Congratulations on the launch of your own business.  For many, becoming the boss is the realization of a life long dream. Your business reflects your values and aspirations. It bears your fingerprints. It is your vision made real.

But your business isn’t you.

There are many reasons that small businesses take the form of an S-Corp or LLC. They may involve taxes, or succession planning, or liability protection. They may be a combination of these reasons. But whatever the reasons, the goal is to make it clear that the business has a life of its own.

It is not you.

I realize it is tempting to think that doesn’t matter.  But it does.  If you don’t operate like a business, then in a dispute, a court or mediator can find that your company is merely your “alter ego.”  In this situation (known as “piercing the corporate veil”) you will become personally liable for all the debts and obligations of the company.

1.     Don’t treat the company bank account like your personal bank account.  If you need to withdraw funds, it is either a loan or an owner distribution, and needs to be reflected properly on the books and records.  Commingling of funds and assets is often one factor used to pierce the corporate veil.  Any owner distributions must be made pro rata based on ownership, so funds must be distributed to all of the owners, not just the one who needs the money. (Each of these approaches have tax ramifications which should be discussed with your tax adviser.)

2.     There are only 2 ways to put money into the company.  You can either make a loan to the company which is memorialized with a promissory note and minimum interest is charged if required by the IRS, or make an additional capital contribution.  If your business needs additional funds, make sure to also discuss this with your CPA or tax adviser to consider the best way to get the money into the business.

3.     Make sure to sign everything in the name of the company and not you personally.  If your company enters into a lease or other contract, the document  should be in the name of your business and you should sign as the President, manager, or other appropriate title.  You should not enter into any contracts in your individual name.

4.     Make sure to have adequate insurance and cash reserves for your business operations.  Talk with your insurance broker about what types of commercial liability, errors and omissions and loss coverage is appropriate for your business.  Often business owners don’t realize what insurance they need until something happens and they don’t have adequate coverage.  Make sure that you keep adequate cash reserves for the operation of your business and unexpected occurrences.  Small companies often underinsure, undercapitalize, and rely on the owner to make up for a lack of cash in the business.  This makes your business look more like your “alter ego” and less like a true stand-alone business.

5.     Have Annual Meetings and Follow Other corporate formalities.  The board of directors of a corporation must appoint the officers each year and the shareholders must elect the directors each year.  This can occur at a duly noticed meeting or by written consent.  Make sure to calendar this requirement each year.  In addition, major actions or decisions of a corporation, such a purchasing real estate, expanding the business, hiring key employees, etc., should be approved by the Board of Directors and sometimes even the shareholders.  Although limited liability companies have fewer corporate formalities, many actions still require consent of management and sometimes the owners, depending on the provisions in the operating agreement for the LLC and statutory requirements.  These decisions should be reflected in minutes from a duly noticed meeting or by written consent.

There are many other factors to consider when operating your business and a short article like this can not attempt to address them all. Your legal and tax advisers can guide you. However, most of the companies that I’ve seen struggling with alter ego problems have violated at least one of these basic guidelines. Being aware of the issues is a great way to avoid problems.

The cost of new carpet

Remodeling my new office has reminded me of a lesson in business. Most notably the cost of new carpet. I tried to cost out all my tenant improvements, and for the most part my budget came out on target. But my carpet estimate was terrible. Why?

It wasn’t because of the price of my new carpet. My estimate was off because I forgot about the cost of the carpet already there. It turns out that the most expensive part of new carpet is actually the removal and disposal of the old carpet.

I should have seen that coming. Not because I remodel commercial spaces on a regular basis. I don’t. But I do help clients again and again who are refreshing their business by expanding distribution channels, adding new partners, new equipment, or new products. The most difficult part of these projects is rarely the exciting new enterprise. It’s rewriting the existing terms and conditions or partnership agreement. Changing filing statuses. Dissolving the old company. Settling matters with the partner who wishes to cash out. In short, the demolition of the old corporate structure often costs more than the replacement.

It can be frustrating to spend money on something that’s no longer needed. But sometimes that’s simply where most of the hard work is hidden. You have to remove the old carpet before you can reap the benefits of the new one. 

Looking forward to 2017

With 2016 rapidly nearing its end, December is a perfect time to reflect on the year that has been and plan for the year to come. As a business owner myself, here are a few ideas I will  live by in 2017.

Don’t fear change. Change is inevitable and unstoppable. You can attempt to hold back the ocean, but you will be swallowed up. Or you can ride the ocean. That’s called surfing, and it is up to you which strategy you will pursue in 2017.

Control what you can, prepare for what you can’t. Focus energy on what you can control. If you are a farmer, you can’t control weather. But you can control wind frost protection and crop insurance. If you are part of a family owned business, you can’t control your family members (even though we wish we all could sometimes); but you can plan for orderly succession of your company or estate. Lastly, you can never control the litigiousness of others, but you can limit your exposure and liability.

Strive for excellence where it matters, but know when OK is OK. I never saw a company fail because they picked the wrong font for their business cards. But many businesses expend a tremendous amount of energy on decisions that won’t really matter in the long run. How to know when it matters? If it will kill the business if you get it wrong, then it definitely matters. Be a perfectionist when it counts. Most issues are open to some level of compromise.

Fear failure, but not mistakes. Every successful business, individual or organization has made mistakes in the past and will make more in the future. That’s part of life. Learn what you can, try not to repeat them, and be adaptable.

On the surface,these suggestions might not sound like legal advice, but many of the legal problems I see stem from choices my clients have made. Consider in advance how you will respond to some of these issues, and you will lay the foundation for a prosperous 2017 and beyond.