Documenting your business
Dec 1, 1997 12:00 PM, Fred S. Steingold
It's human nature to resist paperwork. If you resist too strongly, however, you may miss out on opportunities to:
* safeguard your business and personal assets
* reduce your taxes, and
* lessen the odds of being sued.
Here's a helpful checklist of key documents for small and midsized businesses.
Owners' agreement A partnership agreement or shareholders' agreement lets you pin down the essentials: how much money each owner will put into the business, how each will get paid, how management decisions will be made -- and what happens if an owner wants to leave the business.
If your business is well past the start-up stage and you neglected to prepare an owner's agreement earlier, it's not too late to do it now. A clear document can prevent arguments and costly lawsuits.
S Corporation status If you're incorporated, consider becoming an S corporation. Then there will be no tax on the corporation's income -- only on income earned by the owners. Owners of an S corporation can also use business losses to offset their income from other sources.
Get professional advice before you act. Then, if your tax advisor agrees that you should become an S corporation, file Form 2553 (Election by a Small Business Corporation).
Name protection First, make sure the business name you want is available. Typically, your state's corporation office and your county clerk can tell you if a similar name has already been registered. Check phone books and city directories too. If you find no conflict, filing incorporation papers at the proper government office will usually protect your business name statewide.
Your state law will also specify where you can register the name of your sole proprietorship or partnership. If you do business in several than one states, you can register your name nationally as a trademark.
Lease Usually the landlord will prepare this document -- but you don't have to accept it as is. In all but the tightest real estate markets, terms are negotiable. Clauses can be added, deleted, changed.
To protect yourself, look at each clause carefully. Can you sub-let? Who pays for utilities, maintenance, repairs and property taxes? Is the landlord willing to improve your space with upgraded lighting and flooring before you move in? Do you have an option to renew?
Routine contracts Design a form contract for use with your customers. A key term in any business contract is the warranty the customer will get. Assuming that you're willing to stand behind your products and services, a generous warranty can be a terrific public relations tactic.
In a service business, a contract is often called a quote or proposal -- or, where professional services are offered, a retention letter. Whatever it's called, a well-drafted contract for services can be used over and over by simply changing the client's name and the specifics of the assignment.
Corporate records A good reason to incorporate is to shield your personal assets -- your home, car and bank account -- from liability for business debts. But to get this protection, you must treat the corporation as a separate legal entity.
Keep a corporate record book (you can use an ordinary loose-leaf binder) to hold your corporate bylaws and resolutions of shareholders and directors. If you're transferring or leasing your personal property to the corporation, document this through a bill of sale or a lease kept in the record book.
Employee application form Your form should leave out questions about a person's race, color, religion, sex, national origin, age or disabilities. For details on what's OK to ask and what isn't, check with your state's civil rights commission.
You can use the application form to head off claims of wrongful discharge in which the employee says you promised job security; have each applicant acknowledge that he or she can be fired at any time for any reason -- or no reason at all.
Independent contractor agreements Some people who work for you can be independent contractors rather than employees -- meaning you don't have to withhold taxes, contribute to Social Security or pay workers' compensation premiums. But the IRS is fussy about who you classify as an independent contractor. If the worker is really an employee, you can get hit for hefty taxes and penalties.
It helps if you have a written agreement with each independent contractor stating that he or she will control how the job gets done, supply needed equipment and send periodic invoices.
Make it clear that the independent contractor is free to work for other businesses as well as yours. Keep a copy of the independent contractor's business card and letterhead with the contract to help prove that he or she has a separate business.
Will and trust If you get flattened by a Mack truck tomorrow, you want to be sure your business goes to the family members or business associates whom you've selected. You can do this through a Will.
Consider, too, a Living Trust which not only helps you avoid probate, but can also reduce or eliminate federal estate taxes.
To round out your estate planning, it's smart to sign documents authorizing a family member or trusted friend to make financial and medical decisions for you if you become incapacitated.
Use a Lawyer -- Or Do It Yourself? Some business owners and managers let their lawyers take care of preparing all documents. Others prefer to do the work themselves, relying on self-help books and software programs -many of which are excellent.
The second approach, of course, is more economical but may set the stage for problems down the road. To reduce that risk, have a lawyer look over any self-drafted documents. The cost of such a review will be minimal -- and will save you money in the long run.
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