CHAPTER IV
Growth and Exit Activities
Using a Corporate Attorney to Ward Off Trouble
THE BIGGEST AND MOST OBVIOUS reason for working with a business lawyer is to keep your business on the right side of the law before something bad happens. One accidental wrong move can put your whole business at risk.
Say you open a business selling unique handmade jewelry. You go the safe route and start small, renting booths at local craft fairs and flea markets, and soon your jewelry is just flying off your table. You really can’t make it fast enough. Before long, you’ve incorporated yourself, quit your day job, built a website, purchased a van, hit the road, and you’re marketing your jewelry to every small boutique in the region!
Unfortunately, you didn’t do adequate market research before starting up. When you get to a small, quaint local jewelry shop in a distant town, you see a necklace and earrings hanging in the shop window that look remarkably similar to your design. When you ask the clerk about the items and show her yours, she informs you that not only is she the shop owner, she’s also the jeweler who made them, and she legally protected her design when she created it… 15 years ago!
Oh, and by the way, she has a business lawyer. He quickly sends a cease and desist letter to your official corporate address. The letter says something like this, translated from legalese: Stop making and selling your jewelry that looks just like my design-protected jewelry, or I’m going to sue the pants off you!
Business lawyers can help you do the necessary research, right from the start, to ensure you don’t get blind-sided. They can also help you manage all kinds of other problems. Consider these what-if’s.
1. What if a customer gets hurt or killed using your product?
2. What if someone tries to sue you for any reason?
3. What if a delivery person falls and gets a concussion in your office?
4. What if someone tries to rob you at gunpoint in your shop?
5. What if a customer or employee steals from you?
6. What if a customer breaks a very expensive product, then refuses to pay for it, and your insurance won’t cover the loss?
7. What if an employee shows up to work drunk, falls off a ladder, and breaks a hip?
8. What if a problem employee, the one who didn’t get the promotion he wanted, responds by claiming that you sexually harassed him?
9. What if one of your employees commits a hit-and-run accident in one of your company vehicles?
10. What if your corporate accountant forgets to pay your business’s taxes for a decade?
The answer to every single one of these questions should be overwhelmingly obvious: I’m going to call my attorney!
An attorney can help you understand the specific legal issues surrounding your business or field. Say you’re a magician. It doesn’t matter if you’re selling out casinos in Las Vegas or selling out sandboxes at children’s birthday parties. According to a U.S. law from 1970, you must have a “disaster plan” for your rabbit. I’m not joking. This disaster plan must cover fires, floods, tornadoes, snowstorms, power failures, fleas, and poisoned carrots. (Okay, I might have made that last one up.) Seriously though, if you’re a magician, you must keep a strict travel itinerary for your furry sidekick when you take him out of town and be open to random inspections by the United States Department of Agriculture (USDA). Of course, there is also an annual fee of $40 to keep your magic rabbit licensed.
Corporate attorneys provide broad-based, long-term business advice on typically complicated matters. This often starts with helping you structure your business the right way. They can help you with support on matters ranging from incorporating your new business, to opening your doors, to growing it, right through to selling or closing your business.
I know a local business owner who took a do-it-yourself approach and paid the price. He intended to start his business small, grow it, and eventually sell shares to the public by making an Initial Public Offering (IPO). He did a ton of research, achieved all of his growth targets along the way, and then started planning to take his business public. His plans came to a screeching halt, however, when he discovered that his business could not be taken public at all: It was structured and founded as a limited liability company (LLC). He had initially incorporated his business as an LLC because it was the easiest to do and the tax picture was favorable. Unfortunately, he found out the hard way that he would have to re-structure as a corporation, which would mean a new tax structure, and which ultimately meant he didn’t have enough money to take his company public at that time.
If you share your long-term goals with your corporate attorney, she can assist you in making wise, long-term decisions that still meet your short-term needs. She can help you to achieve your long-term goals in a rational, efficient and legal fashion. She can keep you from having to back-pedal, side-step, shimmy, squeeze, bend, tussle or be tempted to evade the law. Obviously the best way to grow a business is to avoid doing something illegal or strategically off-course.
Business lawyers are there first of all to keep you out of trouble, as well as to help get you out of trouble. If you know when to seek good advice from your business attorney, she can keep you from making the wrong choices and winding up in the court room, or worse!
S.G.
Checking Out for Departure
I’M AFRAID I HAVE BAD NEWS, FRIENDS. You’re going to die. In fact, we are all going to die. To make matters worse, most of us have no idea when it will happen. The only sure thing is that we will.
Now that we’ve faced this tragic truth together, let’s move on and do what we, as entrepreneurs, do best. Plan for it! Draw up a business estate plan!
Business estate plans
Business estate planning is smart, especially if you want to pass your business or stake in a business to your partners or family members. Think of a business estate plan as a living will for your business interests (your “estate”): a directive detailing how you want to dispose of them at the end of your life.
A business estate plan can accomplish two goals:
• Reduce or eliminate uncertainties that may lead to costly legal battles between partners, family members, or stakeholders
• Strategically plan to maximize the benefits to the deceased’s estate while simultaneously creating or maintaining value in the business
While private individuals typically work with family law attorneys to arrange personal estate plans, you would be best served to see your corporate attorney to set up and manage your business estate plan and to integrate it properly with your personal plan. It’s a business matter, and she is best prepared to establish your trust.
Note the word trust. While similar in many ways, a trust is different from a will. If you have a trust in place for your business and its assets, no one can claim your business interests after you die. That’s because a trust legally holds ownership of your business and specifies who will inherit it in the event of your death. Drawing one up generally does not cost a lot, and will save your beneficiary and business a lot of time and money down the line.
Imagine Mike O’Keefe and I operate Expert Business Advice for 50 years. One day, I eat the most delicious pizza ever made and die of pleasure. If I don’t have any immediate family members alive then, and if I don’t have a trust, my share of the business won’t go to Mike. It will go to my nearest living relative, or worse, the government! Eeek! I would come back as a zombie to prevent that from happening!
Beyond the benefit of a seamless transition of your business or stake in a business to whomever you choose, a trust will also provide tax breaks for the person you leave it to. That is, it may avoid inheritance taxes. It will keep the transition simple, limit the publicity surrounding your death, and ensure that your family members, employees, or business partners don’t end up in a court fight.
If you decide to develop a business trust, here are some tips that will help you avoid some common pitfalls:
• Be 100 percent correct about any names you mention in your document. If the names on the business, assets (e.g. real estate), and the names of beneficiaries in the trust don’t match perfectly, you’re creating problems which will cost you or your beneficiaries time and money to rectify in the future, if they can rectify them at all.
• Keep all your business agreements up-to-date, always. Business licenses and other contracts can expire. Make a calendar of renewal and expiration dates, at least for your most important agreements.
• Ensure you keep your business’s organizational house in order so you can rest in peace.
Keyman and buy/sell provisions
There are a couple other things you should consider doing in this context. Say you and your spouse own a company that makes a face soap that has little black abrasive flakes in it—the Pepper-Dermis Soap Company. The two of you run the business so efficiently that the loss of either one of you would be catastrophic.
Alas, one day, while out collecting gravel for your Pepper-Dermis soap, your spouse gets run over by a rhino that escaped from the local zoo. Not only are you emotionally devastated, but there’s no way that you can run the business by yourself or train someone else to fill your spouse’s role. Thankfully, you had the foresight to buy what’s quaintly called Keyman Insurance (the name is slowly evolving toward Key Person Insurance nowadays). It pays out agreed sums to help your business survive the death of a key person in the business. If you have individuals in your business who have a unique skill set, or are responsible for the majority of the business’s profits, consider buying Keyman insurance.
Finally, it’s wise to have a buy/sell agreement, also commonly known as a buyout agreement, if you are a co-owner in a business. It’s a legally binding contract among co-owners that defines what happens if one of the owners dies or has to leave the business for any reason. The most basic buyout agreements articulate who can buy a departing partner’s share of the business (and in what order the share will be offered), what events will trigger the buyout (death, desire, personal bankruptcy, etc.), and what price will be paid for the departing partner’s share.
This is not “nice to have” stuff: It’s necessary. As owners of Expert Business Advice, we have living trusts, Keyman insurance, and a buyout agreement in place. You need to consider doing likewise if you own, or plan to own, a business. Most entrepreneurs don’t have time to worry about the end of their life because they’re too busy planning the rest of theirs. However, if you spend so much time building a business today, don’t you want to protect your legacy and have a say in the way you want it to continue, when you’re gone?
S.G.
Check, Please! How to Wind Down a Business
JUST BECAUSE YOU’RE CLOSING YOUR DOORS, it doesn’t necessarily have to be because your business is tanking. Sometimes, businesses owners just decide they don’t want to do business any more. Maybe their business is small and they can’t or don’t want to find a buyer to carry on. Or it’s time to retire, or they want to focus on another new company start-up. Or the company’s outlook is gloomy due to industry shifts or other factors. A key distinction is whether you are closing in the red (owe people money that you cannot pay) or whether you close in the black (when upon completion, there will be no outstanding debt or liability related to the business).
In any case, if you get to the point where you want to wind down your company, there are a few things you must do beside turning off the lights, locking the doors, and walking away. Some of these steps are obvious, but others are not. It’s imperative now to work with your attorney (and probably also your accountant and tax advisor, plus others) to close your business the right way, so you stay on the good side of the law and avoid penalties down the road. Needless to say, you must observe the procedures and laws that apply at your company’s official site of business, so take the points below as general guides that may vary based on where you are headquartered.
Close the business officially. The specific actions you must take to do this vary according to the type of business structure you picked when you started up, and also the wind-down clauses in your founding documents. If you are a sole proprietor, all you have to do is stand up tall, click your ruby slippers’ heels together three times and say out loud, “There’s NO place like MY business.” At that moment, there will literally be no place like your business, because it will have been dissolved. (Okay, you don’t have to do that.) Your sole proprietorship closes when you say it does; you just have to file the proper paperwork. If, however, there are multiple owners, as in partnerships, limited liability companies (LLCs) and corporations, you must follow the dissolution process outlined in your founding documents. Regardless of the process, document the dissolution on paper.
Dissolve the business with the government. It’s important that you file paperwork to close your business with the government, to keep yourself from continuing to owe business taxes and filing fees. Typically, you can use the same place or website you used to incorporate for this.
Cancel licenses and permits. You must also cancel all the licenses, permits, and trade names you won’t be using in the future. If someone else starts doing business in your name, you could be on the hook for paying the taxes and penalties. Canceling is the same as filing; you just go where you filed and complete the cancelation. The process is simple and easy.
Take care of any obligations to employees. Find out what you must do early on. Your local laws will specify when you must notify employees about the business closing as well as when final pay checks, unused leave compensation and so forth are due.
Pay your taxes and debts. When paying final taxes and debts, always pay your taxes first. If it’s looking like you’re going to have trouble paying your taxes and debts, ask your attorney to try to negotiate your figure down. If she succeeds, it’s likely that you’ll end up owing less overall, even after paying her fee.
Notify your employees, landlord, lessors, customers and creditors. If you’ve been in business a while and your decision to close wasn’t an easy one to make, this can be the most painful part of closing. It’s best to be honest, but not hasty. If you still have contractual obligations for deliveries of products or services, and you think your employees might all just walk out and never come back when you tell them you’re closing, ensure that you can fulfill your contractual obligations before you notify them. If you anticipate emotional reactions, gently remind your employees that libel or slander is a serious crime, something they don’t want to have to deal with while they find a new job. If you really think you might have an issue, it might even be worth hiring an off-duty law enforcement officer to hang out in your lobby for the last few weeks. Typically, this can be coordinated through your local law enforcement agency.
If your business has any leases, ensure you follow whatever terms are in your lease agreements. If you have corporate credit cards and accounts, cancel or close those. It might be best to leave certain cards or accounts open a little longer, in case you have last-minute closing expenses.
Customers should be notified as soon as possible, but not before your employees, to avoid leaks, rumors and so forth. Fulfill any obligations you owe your customers, or offer them full or partial refunds on products or services you cannot provide due to closure.
Line up secure storage for key documents. Find out how long you must store relevant tax, corporate and other documents and make appropriate arrangements for that period of time. Shred and dispose of anything not worth keeping.
It’s always best to try to handle your closure with as much grace and dignity as you can, treating everyone affected by it with professional respect. The last thing you want is a smeared reputation or ongoing personal liability, simply because you botched your closing.
S.G.