Whether a business is taking its first entrepreneurial steps or is continuing on an established record of success, it is vitally important that a number of legal matters are planned for, resolved and put in order. As successful business owners know, it is much easier (and cheaper) to avoid and plan around disputes and other legal problems than it is to hire a lawyer to try to clean up a mess later. Amidst the many issues and concerns pressing on the minds of a business owner, legal preparation and legal planning is be an area where timely attention will provide peace of mind, reduced legal risk and a minimized chance of future disputes. The following five key considerations will provide fundamental guidance to business owners and businesses of all sizes:
1. Business Structure and Entity Selection.
When beginning a business venture (or at any later point, if needed) one of the most important legal decisions to make will be selection of a business form or what is often called a “business entity.” Most business owners are at least roughly familiar with what it means to be a corporation or an LLC. However, there are substantial differences in various types of business entities, each offering its unique strengths and potential drawbacks. Business owners may select to form and operate as a traditional C-corporation, as an Scorporation, a limited liability company, a limited liability partnership, a general partnership, a limited partnership or even simply as a sole proprietor. In considering the selection of the appropriate business entity, the most important factors include:
• Need for limited personal liability
• Anticipated nature of capitalization of the business (owners, investors, etc.)
• Various tax-related factors and considerations
• Manner and procedure of business administration and needed flexibility
• Preference for business name
2. Operating Agreement.
In connection with selecting a type of business entity and forming that entity, all businesses need to pay some considerable attention to the business’ operating and governing documents. While called by different names depending on the type of entity (bylaws, shareholder agreement, operating agreement, partnership agreement, etc.) these documents ultimately serve similar core functions. These matters include:
• Ownership of the business
• Management of the business
• Nature of and obligations relating to capital contributions
• Restrictions on transferability of ownership interest
• Potential for and terms of admission of new owners
• Removal of owners
• Operation and formal business procedures (voting, requirement for written resolutions,
• Right or ability to sell ownership interests (i.e. exit strategy, etc.)
The value and importance of a thorough and well-drafted operating agreement (or bylaws,
partnership agreement, etc., as the case may be) cannot be overstated. Too many business owners end up in difficult and sometimes insurmountable situations due to poor planning or the failure to consider these important fundamental matters. Conversely, a detailed and well-drafted agreement can provide for smooth business operation, satisfied business and legal expectations, controlled ownership outcomes and increased clarity and opportunity for the business owner.
3. Employee Relationships.
Any business that hires employees will be faced with a number of important issues. While identifying and hiring the right people for the right salary/wage is a formidable challenge to begin with, of equal importance is the manner in which their employment is handled from a legal standpoint. Beyond simply hoping to avoid the less common issues of employee discrimination, wrongful termination or employee wage disputes, all employers need to give serious consideration to proactively addressing a number of other employment-related matters. A business has substantial interests that it must protect in order to thrive—and the actions of an employee may play a significant role in those interests. Three preeminent employment issues that must be considered are:
(1) Employment Contract: each employee should have some form of written employment
agreement. In some cases, something very simple will suffice. In other more
complicated employment relationships, a detailed and comprehensive agreement is an
absolute necessity. Employment contracts make clear details including (i) wage or
salary amounts, (ii) employee responsibilities, (iii) restrictive covenants regarding
employee relationships with customers and/or competitors and (iv) to the extent
possible, waiver of employer liability in various scenarios.
(2) “Independent Contractor” vs. “Employee”: The tax and liability ramifications of a worker
being classified as an “independent contractor” vs. an “employee” are significant.
However, state and federal agencies look to much more than a worker’s title or internal
named classification when making this determination. Adequate consideration must be
given to numerous details of a worker’s relationship with the employer.
(3) Non-Competition Covenants: Where needed, non-competition and non-solicitation
covenants are vitally important to protect important business interests. A former
employee stands in a unique position (and may have built unique relationships) enabling
them to take actions, such as competing with the former employer, soliciting business
from customers/clients of the business, or otherwise undermining the interests of the
company. Without precise and appropriate restrictions in place, agreed to in writing, a
business may be left with no remedy in these events. However, properly drafted noncompetition
and non-solicitation covenants can protect important business interests
and avoid what could otherwise be devastating businesses crises.
4. Tax Considerations.
As all business owners realize sooner or later, taxes play a significant role in business operations and business planning. Numerous types of tax issues must be addressed, including:
(1) Varying Taxes Based on Entity Selection. The selection of a particular type of business entity
(as discussed above) will have substantial tax ramifications. Corporations are taxed in a different fashion
than LLCs and even different types of corporations are treated differently from a tax perspective.
(2) S-Corp Tax Election. Depending the type of business and role of the owner, significant
payroll tax liability may be reduced by making appropriate tax elections. This is particularly relevant for
single-member LLCs or LLCs with only a few owners.
(3) Various Taxing Authorities. Most Missouri companies will owe some form of tax to
numerous government authorities including the IRS, the Missouri Department of Revenue and the
Missouri Division of Employment Security. Additional taxes may be due for retail sales tax and other
industry specific taxes.
5. Business Agreements / Contracts.
Most companies enter into a number of written agreements or contracts in connection with operating their business. Such contracts may include commercial real estate leases, supplier agreements, partnership agreements, service agreements, customer contracts and numerous other types of written agreements. While every business owners is anxious to save money and cut costs where possible, the importance of thorough and well-drafted business agreements cannot be overstated. Poorly written or misunderstood contracts are often the source of costly business disputes and lost revenue. On the other hand, clear, concise and well-drafted contracts provide the assurance and legal positioning to help a company move forward confidently—while minimizing the likelihood of future disputes, lawsuits and other problems.