Tip #2: Paperwork Matters
Failing to properly document your business relationships is a ticking time bomb. Misunderstandings with partners or employees can lead to costly disputes. Setting clear agreements early on avoids trouble down the road. This is mistake #2 on our list of 10 legal missteps to dodge. More to come—follow us for updates!
All businesses must properly document the relationship between the owners and other stakeholders. Not doing this can be detrimental in two different ways. First, statutory entities such as corporations require strict adherence to document formalities. Oftentimes, businesses will attempt to incorporate themselves without legal counsel. In many cases, mistakes are made or steps omitted that result in an invalid formation. If the corporation is improperly formed, its shareholders may be personally liable for the debts and obligations of the business.
Second, in the case of a business where two or more individuals are running the company, disputes will inevitably arise alienating one or more of the principals. In extreme cases, a principal may wish to terminate his/her relationship with the business. It is critical the governing documents define the principals’ relationship by including clauses which set forth their duties and responsibilities; provide a means of resolving disputes; address allocation of income; and provide termination rights and distribution of assets upon termination.
Shareholders of closely-held corporations should also consider buy-sell agreements which serve such purposes as: preventing unwanted outsiders from acquiring control of a business or insiders who retire from continuing to hold shares; providing for the continuing ownership and control of remaining shareholders; preventing shareholders from selling their shares which might disrupt existing control or financial allocations; providing an assured market for the shares upon the death of a shareholder; and, establishing a value for the shares for federal estate and gift tax purposes.