Secrets of Maximizing The Value of Your Small Business
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The document provides guidance on various aspects of business formation and management, highlighting key considerations such as entity choice, partner selection, employee management, and customer relations. It emphasizes the importance of legal compliance, formalizing agreements, and careful hiring practices, as well as the potential liabilities and tax implications involved in different business structures. Additionally, it offers practical tips on navigating contracts, outsourcing, and succession planning to enhance business operations and mitigate risks.
Secrets of Maximizing The Value of Your Small Business
- 2. Four Main Categories • Choice of Entity and Entity Formation • Partners, Employees, Contractors, and Customers • Compliance with Federal and State Law • Miscellaneous Legal Compliance and Best Practices
- 3. Choice of Entity Tip #1: Sole proprietorships are a bad idea • No liability shield • No perpetual life • Limited financing options • Suggests (to some) lack of professionalism
- 4. Choice of Entity Tip #2: LLCs offer a lot of advantages for small business—pass-through tax treatment, limited liability protection, structuring flexibility, low annual SCC fee, less formalities and paperwork.
- 5. Choice of Entity Tip #3: Corporations are still popular in many situations • Longer statutory history, more familiarity • Concepts better defined by courts • Some tax benefits • 401(k)/IRA rollover (ROBS) start-up financing plans require a corporate structure
- 6. Choice of Entity Tip #4: Don’t Race to Delaware • The Virginia corporation and LLC statutes are very progressive, flexible, and pro-business • Unless you plan on going public (IPO) or attracting capital from sophisticated, out-of-state institutional investors, there should be no compelling need to incorporate your business in DE.
- 7. Choice of Entity Tip #5: You can be both an LLC AND an S Corporation • It is possible • Organize as an LLC for state law purposes • File an “S” election (IRS Form 2553) or Form 8832 to elect to be taxed as an “S” corporation. • Primary benefit relates to potential self-employment tax savings, but be careful!
- 8. Entity Formation Tip #6: Be wary of the DIY approach • The Internet makes everything seem easy and cheap • Be sure you understand what you’re getting (and what you aren’t) with the LegalZooms of the world • Think twice before hiring the biggest downtown law firm for your small business startup
- 9. Entity Formation Tip #7: Get your entity formed first • Before you start engaging in business activities • Understand what MUST be in your formation documents and what SHOULD be in your formation documents. • If plans change, you can always recycle an entity or easily terminate its existence.
- 10. Entity Formation Tip #8: Business Partners Should Memorialize Key Issues in Written Agreement • Start-up phase is the best time • Average business relationship has 5-7 year life span • Money, management, control, transfers, and succession planning issues are fundamental issues to address
- 11. Entity Formation Tip #9: What’s in a Name? • Don’t forget about d/b/a filings (local and state) • Consider federal or state trademark registrations if your serious about building a brand and growing your business
- 12. Entity Formation Tip #10: Respecting the Entity • Observe proper business entity formalities • Pay attention to signature blocks • Keep the entity in good standing with the SCC • No commingling of assets • Consider foreign qualification requirements
- 13. Partners Tip #11: Choose Your Partners Carefully • Trust and integrity are essential • Skill sets should complement one another, not be identical • Memorialize the relationship in writing from the beginning
- 14. Partners Tip #12: Contributions, Control, and Conflict • 10-12 key issues to memorialize in a Buy-Sell Agreement, Operating Agreement, JV Agreement, etc.
- 15. Partners Tip #13: Address the Phantom Income Problem • Applies to pass-through entities (LLCs, partnerships, S corporations) • Being allocated income for tax purposes without an actual distribution of cash with which to pay taxes
- 16. Employees Tip #14: Classification Issues • Employee vs. Independent Contractor • Interns • Potentially huge consequences if you get it wrong
- 17. Employees Tip #15: Hire Carefully • Don’t underestimate the costs of recruiting and training new employees • A systematic job posting, application, and interviewing process is essential • Keep thorough documentation
- 18. Employees Tip #16: HR Compliance is Critical • Wage and Hour Issues • Employee Policies/Handbook—Document and Follow • Both federal and state laws apply
- 19. Employees Tip #17: Vicarious Liability • Principal is responsible for its agents acting within scope of employment • Training and monitoring are important
- 20. Employees Tip #18: Terminating Employees • At-Will Employment and Exceptions • Follow your own policies and procedures • Be consistent • Be professional, but show compassion and empathy
- 21. Customers Tip #19: The Cooling-Off Rule • Federal and State Law Applies • Customers have 3-day right to cancel contract • Disclosure and documentation requirements
- 22. Customers Tip #20: A Few Tips on Contracts • Protect Yourself by Getting it in Writing • Use clear, active language • Consider ADR or become familiar with GDC forms and procedures
- 23. Recent Legislative Developments Tip #21: Cordless Blinds • Lobbying efforts at federal and state level • Increases risk of litigation and liability • Adequate insurance coverage a must
- 24. Miscellaneous Tip #22: Accepting Credit Cards • For B to C businesses, it’s a practical necessity • Potential liability of misusing or being careless with credit card info; PCI (Payment Card Industry) compliance.
- 25. Miscellaneous Tip #23: Third-Party Vendors • Get it in writing • Communicate expectations clearly • Have an easy exit
- 26. Miscellaneous Tip #24: Don’t be Afraid to Outsource • Payroll, bookkeeping • Marketing • IT • Crowdsourcing becoming very popular
- 27. Miscellaneous Tip #25: Don’t be Quick to Litigate • Expensive • Time-Consuming • Unpredictable • Better options are usually available
- 28. Miscellaneous Tip #26: Business Succession or Exit Planning • Few biz owners devote enough attention to this • Important to maximize enterprise value • Requires a team approach
- 29. Miscellaneous Tip #27: Copyright Issues • Any original work of authorship fixed in a tangible medium of expression. • Photographs—The photographer is generally considered the copyright owner of the photo. • Best practice: Include consent/permission language in your customer agreement.