There are five steps a small business owner can take to set the company up for success and secure its future.
An Expert Business Lawyer Shares His Essential Tips
With more than 18 years working in corporate, commercial and real estate law, lawyer and partner at CBM Lawyers Scott Johnston has seen his fair share of businesses making costly mistakes. Before the disputes arise and dollars are lost, Johnston outlines five steps a small business owner can take to set up a company up for success and secure its future.
When you carry on business as a sole proprietor, you have unlimited personal liability. (Yes, this term should scare you!) It means that your personal bank account, your home, and any assets you own are all on the line and subject to claims by customers, clients, employees, suppliers, and landlords. “The miracle of limited liability,” explains Johnston, “is that when you incorporate a company, you create a separate and distinct legal entity.” It has its own bank account, it files its own tax returns and it’s responsible for the debts and liabilities of your business.
2. Maintain Corporate Records
Once a company has incorporated there’s a requirement to file annual reports in Victoria each year and maintain what’s called a minute book. A minute book is used to store and record all the important corporate and legal documents, such as the incorporation documents, annual consent resolutions, minutes of meetings with shareholders and directors, including the original share certificates of the company.
“Too many business people I see choose to do this themselves,” explains Johnston. “And the problem with that is that if you don’t have a lawyer maintaining your corporate records, when it comes time to get a loan from a bank or credit union, or you wish to sell your business, all those records have to be brought up to date.” It’s a huge task and not one that’s wise to DIY, advises Johnston. “I could make the argument that I would save money by doing my own oil changes, but the reality is, I don’t know how to do an oil change. So if I did try to do it, I’d eventually end up seeking out a mechanic to repair everything at increased cost,” Johnston says.
“This reminds me of a situation where a client was coming in to sell shares of her business, and I said, ‘OK. What we need is the minute book to sell it,’ and she said, ‘What’s a minute book?’ She had an ex-partner fly back into the country once he got wind of this sale and he claimed that he owned the business. Without any records, we couldn’t determine who actually owned it, and now they’re in court fighting one another about who owns the business. So perhaps there were some savings to not maintaining the corporate records, but there was a net loss of hundreds of thousands of dollars because of the lost sale.”
3. Have Your Commercial Lease Reviewed by a Lawyer
If you’re doing things right, eventually your business will expand and you’ll need a workspace, a workshop, a warehouse, etc. When this time comes, your leasing agent will give you what’s called the landlord’s standard form of lease, which could be up to 80 pages long, and they’ll recommend you get independent legal advice to review its terms and conditions. “Too often I see business people who choose not to get that legal advice,” says Johnston. “And the problem is that we can’t really help you after the lease is signed. It’s before it’s signed that we can review it and add value in terms of explaining its terms and perhaps catching provisions that aren’t in your favour as a tenant.”
4. Enter Into a Shareholders’ Agreement Among All the Shareholders of Your Company
A Shareholders’ Agreement—which Johnston says is like the pre-nuptial agreement for the marriage that is a business partnership—defines the buy/sell arrangements when dealing with death, disability, divorce, dispute, default, or departure of a shareholder from the company. And without such an agreement, your business could face shareholder disputes that can be both time consuming and costly.
5. Seek Tax and Accounting Advice from a Qualified Accountant
Often clients won’t seek out a qualified accountant to provide tax and accounting advice to the company. Remember that a bookkeeper does not have the training in tax planning and structuring, which may be invaluable for your business. A chartered professional accountant can assist your company by advising on the initial ownership of shares, the optimum mix of dividend versus employment income, preparing financial statements and filing the required corporate tax returns, valuation of the fair market value of the shares, and providing instructions for future corporate reorganizations to purify your company before a sale or other disposition. The tax-effective planning strategies offered by chartered professional accountants will end up saving you money in taxes payable upon the sale of your business, savings that will transfer to the next generation of family members, or other desired successors in your business plan.
Scott Johnston is a partner at CBM Lawyers with more than 18 years of experience as a solicitor advising clients on corporate/commercial, commercial real estate, and secured lending matters. cbmlawyers.com