So many businesses are started by the seat of the pants, and with only the basics of knowledge about how to organize and run them. The businesses start spontaneously, with its founders’ limited exposure to various types of organizations and bits of information that often result in poor decisions about the legal/tax structure. From these decisions, others begin to follow and continue to “just happen.” As the business of each day takes place, the business structure takes shape. Everyone does what is natural: jump in and start running the business. All too frequently, the structure that takes shape and the decisions that are made make sense for the moment and the needs of the day. However, entrepreneurial types and workshop/garage inventors act on limited information that leave them vulnerable to losing time, money and their intellectual property, because in the long run the decisions made may not be optimal. This simply means that at certain points, a business must reassess and examine whether the legal/tax structures and operations that are in place are optimal for where the organization currently is and where it wants to go.
Good to Go, Better to Cover Your … Assets
Recently I’ve met with a number of garage inventors and first-time entrepreneurs who have been making terrific strides in developing products and meeting with potential companies to be suppliers or strategic suppliers. They have been eager to form alliances and iron out product design details, but they have been overlooking the exposure they have been creating by exposing their product ideas, market and business concepts to other individuals and businesses with advice from non-experts and from documents from website downloads. They considered their businesses “good to go,” but as time passes they’ll need to understand what the impact of various choices of legal entity, tax entity and other decisions mean when it comes to being in business and protecting their assets … especially the products and intellectual property of the business.
For instance, one company was operating using a business name that included “LLC” and they hadn’t filed and setup an LLC (limited liability corporation). Another had documents with the name of the business listed as a corporation; it too had not yet been legally formed. These seemingly simple differences in names have big implications for the validity of any legal agreements signed for the business. You may say, “What’s the big deal?” It can be a very big deal when you find that the legal agreements that you have signed to protect your business and its assets aren’t valid because the business entity doesn’t exist legally, because the proper steps haven’t been taken to create it, or you’ve done something to invalidate the legal protections of the company type you have created.
Some other “simple” things that can cause significant complications include business cards. Simple little pieces of paper right? Not so fast! What happens when you print them for someone you consider a “consultant” or an “independent contractor,” yet you give them the title of Vice President, and the company name, logo, offices, phones, and addresses are on the card … with no indication that this person IS NOT an employee of the company? It appears this person IS an employee to everyone receiving the card; what are the implications to your business? There are more than you may think, and with significant negative consequences if things go wrong. What happens if your consultant over commits your organization without the authority to do so, but a customer or vendor believes that the consultant does have the authority, based on the company relationship you have identified with the business card? (Note: The legal issues that revolve around employee relationships including compensation and benefits, agency rules and a host of other issues outside the scope of this article.)
Stepping Back and Rethinking the Structure
In the short term, getting a business up and running is important, and doing it in a low-cost manner may be a fair trade-off to be able to quickly start operating and generating revenues. As time goes on, it is important to step back and revisit the legal entity type, tax structures and legal agreements to ensure they are appropriate and to determine if you need to update or revise any of them to plug holes, repair mistakes or make changes based on new information and understanding. Quick decisions to get started are understandable and practical for the stage and thought process we are in at the time and situations we are in. However, the accidental business structures we begin with do not have to stay with our organizations forever. We can change legal entity types, apply to the IRS to amend our tax structures (or change them as we change legal entities) and make other modifications of operating agreements, employment agreements, etc. after analyzing our business and knowing more about how we work and the reality of being in business.
Accidents happen. Some bring positive change. Others can lead to catastrophe. Restructuring our organizations shouldn’t be another accident waiting to happen or require a disaster before we take action.
Copyright ©2009 F.O.C.U.S Resource, Inc. by Lea A. Strickland