What Are The Important Areas Of Compliance For Small And Medium Businesses?
The most critical areas of compliance for small and medium businesses are how the business is set up. Things to contemplate when going into business, when buying a business, and when reviewing or deciding how to continue a business is:
- How is the business set up for limiting my liability?
- What happens when I want to share or transfer part or all of my business?
People go into business in all kinds of different fields. When most people start a business, they decide on a business name and then begin soliciting customers and collecting money which may be fine if you’re a one-man (no partner and no employee) shop set up as a Sole Proprietor.
Suppose your business is set up as a Sole Proprietor, but you have a small number of employees, a partner, or you own real estate, vehicles, or machinery. In that case, it’s a good idea to consider whether you should be operating not as a sole proprietor but as some corporate entity or partnership.
The most common entity type for small businesses are corporations, which are called S Corporations for tax purposes. For legal purposes, Attorney Wick Schmidt advises his clients to be aware of their liability should something go wrong.
For instance, say you and another person go into business together and have a couple of employees. Say your business gets sued, whether due to an employee causing an accident or there’s a question of whether your company has complied with a contract.
If you’re in business as a sole proprietorship or as an unorganized partnership, all the owners’ assets may be available to the people who are suing. You can never wholly insulate yourself from a lawsuit because if you injure somebody, such as driving a truck and running over a pedestrian, the person you run over is always going to be able to sue you.
However, suppose you’re operating a small business that is to be set up as a corporation. In this case, a Limited Liability Company (LLC) or Limited Liability Partnership (LLP) may be necessary to protect your personal assets from the mistakes of your employees or partners. Being set up as a corporation can ensure safeguarding. If there’s an issue of a breach of a contract or an unpaid debt, being set up as a corporation will protect your assets from any business liability.
Another essential thing to be aware of is if even only two people are in business together, they should think about the following:
- How the company should operate
- Who is going to have which role and authority
- What is going to happen if you want to go your separate ways
- What will happen if a business partner is dying or retiring or when you want to have a so-called Business Divorce?
Separating from business partners isn’t always amicable. As a Business Law attorney, Wick sees both ways. It’s beneficial to have a corporate entity set up with clear records of who owns what and a shareholder agreement or limited liability company operating agreement that outlines what happens if the owners go their separate ways.
What Areas Do Small And Medium Businesses Make Mistakes In Falling Short Of Compliance?
One common compliance mistake Wick sees is a corporate entity or limited liability company not having any bylaws, operating agreements, or shareholder agreements. Wick has seen people never broach the topic. For example, he had a case where people had paid a lawyer several thousand dollars to prepare all the legal aspects. Still, they never signed the legal documents, so whether these documents and agreements they’d paid for were even operative and governing.
From a legal perspective, the owners never signing the agreements was regrettable. The requirements for having an entity set up are not particularly onerous and should not cost you a ton of money to have a lawyer prepare. Some people try to create operating and shareholder agreements themselves, which can be risky.
When your business is set up as a Limited Liability Company or a Corporation, there are requirements for the state that you must file an Annual Report and pay a minimal fee yearly. Wick has had clients come to his office to discuss their business and its organizational structure. He will then go onto the state’s website and find out that the company was set up as an LLC ten years ago, but they never filed an annual report.
Unfortunately, their LLC “administratively” dissolved five years ago. The requirements for keeping an LLC in good standing with the state are not onerous, but you must pay attention, file annual reports, and keep the state apprised of your principal offices.
Filing an annual report with the state takes about five minutes and only has to be done once per year. Wick has had many clients who set their business up before coming to him, and they haven’t followed even the minimal requirements to keep them in good standing with the state.
What Is The Cost Of Non-Compliance Or Falling Short Of Compliance?
The cost of non-compliance with filing annual reports is the state issuing a fine for fixing the problem. The issues that arise can be severe if your business is caught in a crisis but your entity is administratively dissolved. For instance, Wick had a case several years ago where a client’s multi-six-figure lawsuit was thrown out of court because they hadn’t taken steps to keep their entity in good standing.
Failing to keep your entity in a good place can also sometimes lead to a creditor being able to go after your assets. Not filing your annual report may never return to bite you, but the consequences can be very severe if it does.
What Are Recommendations For Small To Medium Businesses To Ensure They Are Compliant?
In the beginning, paying a lawyer to set up your entity can go a long way down the road, ensuring you won’t have to pay a lot more to a lawyer to fix the problems that arise. Even though it’s possible to set up a small business on your own, it’s worth seeing a lawyer and having the lawyer do it properly.
For more information on Compliance For Small And Medium Businesses, an initial consultation is your next best step. Get the information and legal answers you seek by calling (920) 759-8114 today.
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