Posted by JuJuan Buford @JSBUFORD
Disclaimer: This content has been made available for informational and educational purposes only and is not meant to be a substitute for legal, accounting, or other professional advice. If you have specific questions about any legal matter, you should consult with an attorney or other professional services provider.
One of the most commonly asked questions among new business owners, is how important is it that I seek guidance regarding properly structuring my business? Not fully understanding what structuring a business really entails:
- Understanding what is the difference between a DBA, LLC, S-Corp, C-Corp, or L3C?
- What are my intellectual property rights, and how do I protect them?
- What is an operating agreement, and what other documents do I need? (Here's a side bar. When I learn of an entrepreneur not being able to secure monies from a bank, micro-lender, or a private investor doesn't return their phone call, 90% of the time it's because they were able to produce an operating agreement, balance sheet, income statement, and or cash flow statement)
- Am I going to compensate myself as 1099 or W-2?
Not knowing the answers to these questions, is the equivalent of building a house without investing in or inspecting its foundations. Sooner or later, very expensive troubles are going to find you.
Additionally, one of the most significant challenges fledgling and established business owners face alike today, is finding and retaining good, talented employees and business partners. Unwittingly, many business owners actually sabotage their efforts to attract and retain talent by not having the following documents in place: an operating agreement, a confidentiality agreement, contracting agreement, and a non-compete or non-circumvent agreement.
Many will argue that because they are still just a small operation (the attitude comes before the altitude), they are not generating significant revenues, or they are a sole-prop there is not a pressing need for these documents. However, what many entrepreneurs frequently fail to realize is that these documents are very important not simply because of their utility, but because of what they broadcast to the world about your business.
Having these documents at your disposal or not having them signals to prospective business partners, affiliates, employees, contract workers, and prospective investors whether you’re a swashbuckling pirate attempting to collect some quick bounty, or whether your running a serious operation with a solid foundation that should be respected.
An Operating Agreement
Plainly speaking an operating agreement is an arrangement between members or shareholders of a business entity regarding they conduct business affairs. It spells out the rights of members or shareholders, obligations, and procedures regarding how the business is to be managed. It provides clarity, and helps parties stay in their lane, and play nice.
As a business owner/s your value proposition can be phenomenal and you can be surrounded by all the talent in the world, but if individuals aren’t clear about what is expected of each other, things can go south very quickly. People don’t rehearse accidents resulting in disabilities, car accidents and untimely deaths, divorces, or simply losing personal interest in a business. And regardless of how fine of character you believe someone to be, we all have been surprised at one time in our lives by wolves hiding in sheep's clothing. Operating agreements resolve these issues and more.
- Voting rights,
- Issues related to parties leaving and possibly becoming competition,
- How a buyout may need to be handled,
- How profits are distributed,
- Expectations regarding how monies invested will be handled,
- Buyout provisions,
- What happens in the event of disability or death, and
- How the company will be taxed.
As an aside, having an operating agreement also helps to demarcate the lines between personal affairs and business affairs, offering greater protection from legal challenges arising from tax issues as well.
A Confidentiality Agreement / Non-Disclosure Agreeement
NDA - Sample Non-Disclosure Agreement
You have this incredible idea, and you throw 100% of your will, intellect, and finances into birthing it into a living, breathing, profit creating reality. You’ve included your best buds and trusted confidants in the process, and sought out talent that you don’t possess to help you scale your blossoming business. Only to find out someone has “stolen” your idea, your recipe, insight into your marketing strategy or business plan, or information about your customers.
Confidentiality agreements dissuade parties from committing the aforementioned offenses and protects your business interests.
Non-Compete, Non-Solicitation, Non-Circumvents
These documents place restrictions upon employees, contract workers, shareholders, and even passive investors from directly or indirectly competing against your business. Depending on how these documents are drawn up, they can address issues relating to an employee or contractor joining another competitor while employed by you, after the end of working relationship, or a period following termination. They can also be effective at preventing parties from investing in or lending monetary assistance to a competitor.
They are especially effective at preventing or limiting activities such as disclosing confidential information, information regarding clients, sharing information for the purposes of disparagement, or usurping activities involving suppliers or providers of technical assistance.
Contracting Agreement
Sample Independent Contracting Agreement
Contracting agreements outline expectations regarding services to be provided or products to be delivered, accompanied with agreed upon compensation for products and services. This document provides the basis for recompense if a client, vendor, or other parties you’re engaged in business activities with. This isn’t your granddaddy’s economy or society anymore. Unfortunately, a handshake or verbal commitment isn’t worth what it used to be.
You’re interviewing ideal candidates for work in your business, and they continually opt to work elsewhere? You’ve been taken advantage of, having experienced material theft or property right infringement? Your employees or contract workers arrive late and unprepared, destroy or lose equipment or supplies, or disparage you openly or covertly? You're finding that potential investors listen to you politely, and disappear shortly thereafter?
Remember, the way you introduce your business and onboard someone - the presence of the aforementioned documents being a critical part of the process - for the purposes of seeking their labor or currency informs them how seriously to take you, and dissuades the bad behavior that occurs all too often in business.
Do you have additional questions? Call 888.549.9689 x.101 or I invite you to visit my online calendar at https://bit.ly/SmallBizArchitectureMeetUp
And if you found this article and any of our content to be awesome, and you're feeling tipsy? Buy me a coffee!
JuJuan Buford, Managing Partner
888.549.9689 / [email protected]