I'm continuing in the red flag series today, highlighting red flag issues for small businesses (for an overview of the red flag series, see this introductory post). Whether you started a corporation or a LLC, formed a partnership with someone else, or even if you operate your business as a sole proprietor, there are some legal red flags of which you should be aware. Through proper planning and risk management, businesses can work to reduce their exposure to legal liabilities, and can reduce the personal liabilities of the owners. These are basic steps that an attorney can assist a business owner with, but business owners should also be aware of other red flag issues that might arise from time to time. This list is not exhaustive or complete, and there are other issues that certainly do arise from time to time.
First, if you are in business with another person or persons, the structure of that business and the contractual relationship between the owners is very important. A big red flag I often see is where folks have gone into business together but have failed to plan and not have put in place an owners' agreement (often called a shareholders' agreement for corporations, a members' agreement for an LLC, and a partnership agreement for partnerships). These documents plan for what happens when an owner wants out, when other owners want one owner out, when someone dies or becomes disabled, or when folks effectively stop working for the business. It is easier to put these agreements together and in place early on when everyone likes each other and still gets along. When something bad happens to fracture the relationship among the owners, it is very difficult to put agreements in place. In my view, it's not a question of whether these documents will be needed, it's a question of when they'll be needed.
A second red flag is inattention to business record keeping. If you have formed a corporation or LLC, the organizing documents and applicable law may require annual meetings of owners or members and regular director or manager meetings, etc. These requirements need to be satisfied, and they need to be documented. It is important to maintain the separate existence of the business entity and make sure it is not an alter ego of the owner(s), as failing to maintain proper business records may result in the expected limited liability protections not being effective to shield owners from personal liability.
Third, along the lines of business record keeping, business accounting is critical. Every business should have a relationship with a CPA from whom they can get tax and accounting advice, ensure that the accounting system and internal controls are set up properly, are functioning well for the business and are maintained in good order. Your CPA can also help with tax returns, payroll issues, and the numerous regulations relating to tax and accounting.
Fourth, business owners should understand the separate existence of their business and the of owners as individuals. To that end, when the business enters contracts, business owners need to understand how to bind the company, and not themselves individually, to the liabilities. Further, managers and owners who sign agreements and contracts on behalf of the company need to ensure that they have a good understanding of what those documents mean, and have them reviewed by the company's counsel when appropriate.
Finally, other red flags might be non-compliance with sales tax and other tax issues, business licensing issues, foreign corporation registrations where needed when doing business in other states, etc. Keep watching for more posts in the Georgia Business Law category for future, related posts in this area.
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