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’ agreementA partnership agreement or shareholders’ agreement lets you pin down theessentials: how much money each owner will put into the business, how eachwill get paid, how management decisions will be made — and what happens ifan owner wants to leave the business.
If your business is well past the start-up stage and you neglected toprepare an owner’s agreement earlier, it’s not too late to do it now. Aclear document can prevent arguments and costly lawsuits.
S Corporation statusIf you’re incorporated, consider becoming an S corporation. Then there willbe no tax on the corporation’s income — only on income earned by theowners. Owners of an S corporation can also use business losses to offsettheir income from other sources.
Get professional advice before you act. Then, if your tax advisor agreesthat you should become an S corporation, file Form 2553 (Election by aSmall Business Corporation).
Name protectionFirst, make sure the business name you want is available. Typically, yourstate’s corporation office and your county clerk can tell you if a similarname has already been registered. Check phone books and city directoriestoo. If you find no conflict, filing incorporation papers at the propergovernment office will usually protect your business name statewide.
Your state law will also specify where you can register the name of yoursole proprietorship or partnership. If you do business in several than onestates, you can register your name nationally as a trademark.
LeaseUsually the landlord will prepare this document — but you don’t have toaccept it as is. In all but the tightest real estate markets, terms arenegotiable. Clauses can be added, deleted, changed.
To protect yourself, look at each clause carefully. Can you sub-let? Whopays for utilities, maintenance, repairs and property taxes? Is thelandlord willing to improve your space with upgraded lighting and flooringbefore you move in? Do you have an option to renew?
Routine contractsDesign a form contract for use with your customers. A key term in anybusiness contract is the warranty the customer will get. Assuming thatyou’re willing to stand behind your products and services, a generouswarranty 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. Whateverit’s called, a well-drafted contract for services can be used over and overby simply changing the client’s name and the specifics of the assignment.
Corporate recordsA good reason to incorporate is to shield your personal assets — yourhome, car and bank account — from liability for business debts. But to getthis protection, you must treat the corporation as a separate legal entity.
Keep a corporate record book (you can use an ordinary loose-leaf binder) tohold your corporate bylaws and resolutions of shareholders and directors.If you’re transferring or leasing your personal property to thecorporation, document this through a bill of sale or a lease kept in therecord book.
Employee application formYour form should leave out questions about a person’s race, color,religion, sex, national origin, age or disabilities. For details on what’sOK 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 dischargein which the employee says you promised job security; have each applicantacknowledge that he or she can be fired at any time for any reason — or noreason at all.
Independent contractor agreementsSome people who work for you can be independent contractors rather thanemployees — meaning you don’t have to withhold taxes, contribute to SocialSecurity or pay workers’ compensation premiums. But the IRS is fussy aboutwho you classify as an independent contractor. If the worker is really anemployee, you can get hit for hefty taxes and penalties.
It helps if you have a written agreement with each independent contractorstating that he or she will control how the job gets done, supply neededequipment and send periodic invoices.
Make it clear that the independent contractor is free to work for otherbusinesses as well as yours. Keep a copy of the independent contractor’sbusiness card and letterhead with the contract to help prove that he or shehas a separate business.
Will and trustIf you get flattened by a Mack truck tomorrow, you want to be sure yourbusiness goes to the family members or business associates whom you’veselected. You can do this through a Will.
Consider, too, a Living Trust which not only helps you avoid probate, butcan also reduce or eliminate federal estate taxes.
To round out your estate planning, it’s smart to sign documents authorizinga family member or trusted friend to make financial and medical decisionsfor you if you become incapacitated.
Use a Lawyer — Or Do It Yourself?Some business owners and managers let their lawyers take care of preparingall documents. Others prefer to do the work themselves, relying onself-help books and software programs -many of which are excellent.
The second approach, of course, is more economical but may set the stagefor problems down the road. To reduce that risk, have a lawyer look overany self-drafted documents. The cost of such a review will be minimal –and will save you money in the long run.