New Year's Legal Resolutions
With the New Year generally comes new resolutions – typically involving those things we’ve been meaning to do but haven’t. All too often resolutions require things we would prefer to avoid. Business owners should also make a habit of making annual New Year’s resolutions. With this in mind, what follows are some suggested resolution for small business owners.
Resolve to attend to your corporate formalities. Many small business owners are structured as corporations. Corporations must conduct annual meetings of shareholders. These may be real meetings with actual shareholders, or “paper meetings” in which everything is done by written consent instead of an actual meeting. Nonetheless, it’s important that you properly document such “corporate formalities.” Your failure to do so could be used as ammunition by those who might try to avoid the liability shield usually afforded by corporations to its shareholders (also known as “piercing the corporate veil”).
Among other things, an annual meeting usually includes the shareholders electing the corporation’s board of directors and acting on matters requiring shareholder approval.
Most corporations also simultaneously hold their annual meeting of the board of directors. Your failure to do so could be further ammunition in a creditor’s attempts to pierce the corporate veil. At that meeting, the directors should elect officers for the upcoming year and approve or ratify all other items that require board approval. Also, (to the extent not previously done) the board should prepare minutes to specifically ratify extraordinary corporate events that occurred during the previous year.
The final bit of housekeeping in this resolution relates to your annual report to the Secretary of State. Failure to file your annual report and to pay the annual fee could result in your corporation being involuntarily dissolved. (In that instance, the corporate liability shield may well be lost.) Fixing this problem can be costly. Also, to the extent you do business in other states, you will want to make sure you are registered to do business there. Likewise, if you no longer do business in a particular state, now is the time to withdraw registration.
Resolve to revisit, or establish, a document retention policy. If you are like many business owners, you probably have file drawers worth of documents going back many years. Records can include things items that might not be obvious such as old desk calendars, electronic documents (emails and the like) and telephone message books. The law requires some documents (such as tax information) to be kept for a certain period of time. Also, a written document retention policy may be your best (and only) defense against charges that certain documents were only destroyed because of the possibility of imminent litigation. It’s best to talk to your legal counsel about this issue.
Documents also include email. Do you have and enforce email retention policies, or does your company still have every email sent since it was formed? In addition to the storage costs, keeping old email creates a huge number of records that may need to be searched if litigation arises, and may hold unwelcome surprises during e-discovery. You should implement an automatic deletion program (unless litigation is pending or eminent) for all email other than those earmarked for long term storage.
Resolve to analyze the titles held by your officers. It’s a good idea to review titles held by your officers on a yearly basis. Look to see if titles still correctly reflect spheres of responsibility. Many businesses don’t and instead continue with the same officer designations year after year. Use this as an opportunity to revisit your overall business and to reward talent. It also won’t hurt if you are looking to sell your company – potential purchasers usually like to see a depth of management.
Resolve to look into business succession planning. Many small business owners utilize the annual gift exclusion to transfer ownership interests in their companies each year as part of their succession planning. While much is written and spoken about business succession, such plans are created and implemented less frequently than one might imagine. There are many different ways to plan for an orderly transition of business ownership. You should consider resolving to deal with these emotional and difficult issues at year-end or early in the New Year.
Resolve to examine your insurance coverage and needs. Make an appointment to meet with you insurance advisor to go over what coverage you have and what you might need. There’s no need to pay for coverage that’s no longer relevant to your operations or that has become irrelevant. It’s also important to arrange for coverage that’s really needed – such as key man insurance.
Resolve to examine existing contracts. At least once a year review all of your contracts, especially those with vendors and suppliers. Some contracts contain clauses stipulating that they automatically renew unless notice of cancellation is given within specific timeframes. Note and calendar all such dates so that, if desired, you aren’t stuck with a renewed contract. Also note upcoming requirements and deadlines. What was fresh in your mind a year ago may no longer be so.
Resolve to better document your HR activities. Many small businesses fail to properly document an employee’s performance. In the event you fire someone for poor performance or discipline, your best defense against paying unemployment is proper documentation of past problems with that employee. Likewise, having a written anti-discrimination policy may help you avoid legal liability in that context. Again, it’s best to consult with your legal advisor.
Resolve to properly document the rights and responsibilities of multiple owners in a business. Whether you are a corporation, a limited liability or a partnership, it’s best to document in writing the relations between multiple owners of a business. Most cooperative ventures, like marriages, are destined for a certain amount of strife and controversy if not dissolution. A shareholders’ agreement, operating agreement or partnership agreement allows everyone to plan for such events now while relations are harmonious. Savvy business owners know that doing so now helps avoid potential protracted legal battles down the road.
by Thomas C. Pavlik, Jr.