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Smooth Sailing for Businesses

Good sailing is not so much about good conditions as it is about good planning.  Ideal weather conditions obviously make sailing much easier and more enjoyable.  However, racing sailors can separate themselves from the fleet when conditions become difficult.  Each boat is faced with similar conditions.  The winner is the one with the best strategy and ability to execute in tough conditions.  In that regard, racing a sailboat is much like operating a new or growing business.

It has been tough sailing in the recent economy, and many businesses have either succumbed to the conditions or tried to bail themselves out to stay afloat.  Meanwhile, strong businesses are pulling away from the fleet thanks to good preparation, planning, adaption, and execution.

Ready Your Boat Before the Start

There are many things that can be taken care of after the start.  Yet pre-start preparation cannot be overlooked.  The same goes for building or expanding a business.  All businesses should have a variety of critical agreements and documents in place prior to getting too far along.

Formation.  Whether a business is formed as a corporation, partnership or limited liability company, it must be a legally organized entity.  The type of entity chosen will take careful analysis. 

Factors include tax, liability, governance and funding, among others. When the type is determined, organizational documents must be properly drafted and filed with the appropriate state agency.  Employment identification numbers must be obtained where necessary.  Minute books should be prepared, and ownership of the business should be documented.

Standard Operating Procedures.  The rules of governance of the business must be clearly established and understood by all owners, directors, members and managers.  These can take the form of by-laws for a corporation, an operating agreement for a limited liability company or a partnership agreement for a partnership.  Without understanding the governance procedures and requirements, misunderstandings are bound to occur which can derail the forward motion of the venture.

Shareholders’ Agreements.  In new, small or closely-held businesses, owners must be prepared for the death or disability of an owner or an owner’s desire or need to leave the business.  Disputes often arise as to whether or not an owner-operator can transfer his or her interest and how to handle a buyout of the interest of a deceased or disabled owner.  Set the ground rules in advance.

Understand the Conditions.  Never turn your back on the weather.  It is impossible to foresee everything that Mother Nature may have in store, and it is impossible to foresee every obstacle that will be encountered in your business.  However, just as in sailing, planning for foreseeable consequences is necessary to carry you through the rough conditions.

Written Contracts.  All business arrangements and agreements should be documented.  Though many verbal agreements are enforceable, a written agreement limits the potential for misunderstanding and can provide protection in litigious situations.

Insurance Agreements.  Insurance serves to lessen the risk of unexpected and potentially disastrous events that may sink the company.  Insurance also protects the individual members, workforce and beneficiaries of the business from unforeseen injuries, damages and health problems.

Licensing and Compliance Agreements.  Failure to comply with licensing or regulatory requirements can capsize the ship quickly.  Companies must ensure that they are in good standing and adhere to any and all regulatory authorities within their local jurisdictions as well as federal and international authorities where applicable.

Non-Disclosure and Confidentiality Agreements.  Confidentiality agreements work to prevent parties from disclosing sensitive information could get into the hands of your competition.  They are not a one-size-fits-all document and should be carefully drafted to meet the circumstances.

Choose a Good Crew

Employment Agreements.  The agreements define the relationship and terms for key long-term employees.  Far too often, companies operate without sound employment agreements or understandings that leave them very vulnerable to employees not meeting performance standards, leaving the company for a competitor or leaving room for disputes in wages and responsibilities. Employee Manuals are recommended if there are more than a few employees.

Engagement Agreements/Consulting Agreements.  These agreements should clearly outline and document the services, project scope, statement of work and payment arrangements of independent contractors and consultants.  This works both ways.  They should be legally sound both for work the business is being contracted to perform, as well as for work being contracted out to independent contractors.  Falsely classified “independent contractors” who actually meet the standards of a full time employee are one of the biggest red flags that can signal the IRS to take a deeper look into a business and may result in an assessment for payroll taxes with interest and penalties.

Legal Counsel and Accountants.  Choose good advisors and trust their advice.  Successful business planning allows companies to position their boats for both optimal conditions and choppy waters.  Effective attorneys and accountants help businesses spot the gusts and wind shifts, execute transactions and position companies for smoother and faster sailing.

For more information about business planning, or competitive sailing for that matter, please contact James W. Constable at Wright, Constable & Skeen, LLP.

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