MOVING FORWARD: DOCUMENTING RELATIONSHIPS

Once your business has its infrastructure in place (see my earlier posts), the next important objective is to document every relationship with a signed agreement. In this post, I will build on the foundation we’ve previously established with the four-tab, business plan notebook. You’ve already generated the policies and procedures for each function of your business. Now it’s time to examine what’s involved in being an owner and the exact terms for every other relationship within the business. Get out a fresh notebook and let’s begin.

Ownership Agreements

In much the same way that we’ve created the business plan, we are now going to produce a separate notebook dedicated to each contract that your company makes. This notebook will open with your ownership agreements.

First of all, you need to know the correct terminology for every type of owner relationship. If your business is a corporation, you and any other owners are called “shareholders.” In turn, if you choose to have a partnership, you are then deemed “partners.” Finally, if you decide to have a limited liability company, you and your co-owners are viewed as “members.”

Although the terms may differ, the idea behind ownership agreements remains the same. Typically, these kinds of contracts include restrictions on what you can and cannot do with your ownership. In other words, the agreement makes the process of transferring ownership to other parties crystal clear.

There are two categories for transfers:

 Voluntary transfers are sales or transfers of stock in your business. This act is done willingly and the result is that the business has a new owner or owners.

Involuntary transfers occur due to circumstances that are often beyond an owner’s control. Death, divorce or bankruptcy could cause the need for ownership to be transferred, even if one player did not intend for this outcome to happen.

While the concept of transfers is simple, if there is no written agreement, you could find yourself in a lot of trouble down the line. So it’s imperative that you and your co-owners write down the exact specifications for any transfers going forward.

Voluntary Transfers

Voluntary transfers usually have one of three different structures:

•  Owners can transfer their shares at any time. But they must give the right of first refusal to the business and other stockholders.
• Owners are not obligated to provide the right of first refusal to the current owners. They just need to inform the other key players in the business of this decision. Therefore, it’s simply a notice requirement.
• Owners may not transfer their shares in the business under any circumstances whatsoever. It may be possible to sell them back to the corporation. But if the company doesn’t want these shares, the owner is stuck with them.

Involuntary Transfers

Involuntary transfers also need to have stipulations within your ownership contract. To do this, the contract can include language that says in the event that the stock is transferred involuntarily by divorce or by order of the court, for example, the shares are proclaimed to have no value. This situation is what’s called a “poison pill.” Basically, it means the shares can be taken through an involuntary transfer, but they are then worthless.

An involuntary transfer due to an unexpected death is a bit more complicated. I find the simplest way to handle that scenario is that the corporation takes out an insurance policy on the owners. If one of the partners dies, the insurance money pays the business. Those funds are then passed to the surviving spouse to buy out that individual from playing any type of role in the company. This is called “key man insurance” and it’s a way for the company to maintain its control even after an owner dies.

In addition to the procedure for voluntary and involuntary transfers, the ownership contract should also define the distinct responsibilities of each of the main people who have shares in this business. Basically, nothing should be left unsaid.

Other Relationship Agreements

Now that you have every detail written out in your ownership contracts, I want to stress that this notebook must also include all of the other relationship contracts associated with your business. In no uncertain terms, your company must create a written agreement to accompany every single relationship that exists for its benefit.

Some prime examples of these agreements include:

·        The relationship of your business to your landlord;

·        The relationship of your business to your bank;

·        The relationship of your business to your vendors; and

·        The relationship of your business to your employees.

To put it simply, any relationship that could otherwise rely on a handshake or a verbal agreement needs to be written out and signed so that there are never any misunderstandings. This way, you’ll always have straightforward documents that spell out how your business operates in relation to other parties.

Next time, I will explain how the ownership of your company should be allocated. In essence, it’s important to have a procedure in place to figure out who has the final say in making important decisions about your small business. I’ll tell you the best way to approach this crucial concern.

CREATING A CUSTOMIZED BUSINESS PLAN

This is your small business. But you can’t possibly know every detail that goes into the three important functions of your company (A Visionary ­to focus on promoting your business’s image in the marketplace; A Manager to develop efficient systems to generate and distribute your business’s products; and A Technician to get the work completed with the necessary skill and expertise).

You and your team together have the expertise

Teamwork Matters

Once you’ve determined which of the three roles suits you the best, you can then find talented people to fill the other two positions. That’s when you’re in the right place to begin tackling your actual business plan. You and your team together have the valuable expertise needed to make a business plan that’s unique and specific to your industry.

As to the Visionary function, the person you hire must create a detailed marketing plan that identifies the target customer base, specifies the exact manner by which these customers can be found (e.g. social media advertising, public event exposure, expositions, lead lists) and sets forth a weekly plan for achieving measurable customer base growth. This means that on any given week during the six month build of the marketing department of your business, you can easily see the systems being constructed to generate a reliable stream of customers for your product and to effectively follow up on customer leads, customer satisfaction and referrals. In short, you are building an in-house advertising agency for your business, complete with marketing policies, procedures and performance criteria.

Similarly, the person you hire to perform the Manager function must be detail-oriented and must be capable of drafting an Operations manual that spells out the precise system by which a customer order gets processed. (e.g. from intake, to packing, to shipping, to tracking) and ultimately, results in an on-time delivery of the product to the customer. This means that over the six month build of your distribution department, you can identify the orderly systems being created, so that your company will be equipped to respond to customer demand in an efficient, timely manner that will maximize customer satisfaction and repeat business.

A Better Idea

Instead of buying a general text at a bookstore to give you vague steps for this important document, I have a better idea. Get a notebook and divide it into three sections. Every section should have its own tab that represents each of the three positions we’ve discussed.

Now, spell out what is needed for each role in great detail. This means working closely with your two other experts to write down everything that has to be done so that your business can have a successful launch.

As soon as you have a comprehensive outline of every duty that’s included in each of your three functions, assign dates. By including dates next to each of the items, you can measure your progress as you work towards the day you open your doors. At any given time, you’re then able to look through this notebook and see how your business compares to the day-by-day plan you have created with your main staff.

If implementing a billing system has taken longer than planned, adjust it as needed. But at least you are on top of each particular point in a timely manner. Plus, your other two players are more in tune with accomplishing the goals they’ve helped originate according to the specified deadlines.

The Fourth Tab

At this point, you’ve got every single action for your business written into this notebook. Now, add a fourth tab. This one is for the overall list that features every single duty and its corresponding date. Call this tab your timeline.

The beautiful thing about this tab is that you get to see how everything fits together for your small business’s upcoming entrance into the marketplace. Essentially, you now have the big picture. So you can flip open this section of your notebook and know exactly what needs to be done on any particular day.

Refer to this tab frequently. It will keep you in check and provide the necessary infrastructure for ensuring you are always on target.

This notebook is your business plan. It contains all of the information you need to move forward and meet your launch goals as seamlessly as possible.

Next, I will apply what we've discussed in creating a business plan to documenting relationships within your new company. You'll see why it's so important to have written agreements accompanying every single relationship that is associated with your small business.

Need More Help?

For over 20 years, our experienced attorneys at DregerLaw have assisted hundreds of business owners throughout Chicago and Northern Illinois. We can help you as well. Call us at 312-322-0955. Or use our online form so that we can guide you on your legal rights as a small business owner.

MOVING FORWARD: THE IMPORTANCE OF INFRASTRUCTURE TO YOUR SMALL BUSINESS

In my experience, I have seen many clients start their own businesses because they were frustrated with the company where they used to work. They believe that they have the knowledge to run a business much better than the people who are operating their current place of employment. After all, how hard could this be?

"After all, how hard can this be?"

The Three Essential Roles

While this is probably true, the mistake these individuals make when they go off on their own is that they don’t understand that every successful business must have an infrastructure comprised of three (3) crucial roles. Michael E. Gerber, author of The E-Myth Revisited, defines these key positions as:

*  The Visionary;

*  The Manager; and

*  The Technician.

The Visionary, who’s usually the one who starts this new business, is the driving force behind the business, the person with the company’s big picture. Next, is the Manager, who is necessary for carrying out the strategies of the Visionary by developing and controlling the product distribution systems and overseeing the company’s operations. Whether your small business makes shoes or serves hamburgers, you need a manager to make sure systems are set up to get the work done.

Finally, the Technician is the player who’s in the trenches, producing the items your business sells to generate revenue. Moreover, it is the Technician who anchors the Visionary and the Manager, for without the Technician, the business has nothing to sell.

But just recognizing the Visionary/Manager/Technician components will not, in itself, allow your business to “move forward”. This is because in most instances, the aspiring business owner who decided to launch the new business is often a Technician at heart, with absolutely no idea how to manage the business and even less idea how to envision plans for its growth. This frustrated Technician turned entrepreneur, is not going to find any guidance from a traditional business plan.

Finding Qualified People to Fill the Roles and Build the Infrastructure

As a business owner, you might not feel you have the Visionary sense to invent successful marketing plans so that potential clients learn about your services. Or maybe you don’t think you’re capable of devising effective Manager systems to make sure your company’s products are both created and distributed as efficiently as possible.

So then, how do you, as a new business owner/Technician handle the role of a Visionary and Manager to “move forward”?

The answer is simple. Don’t try to perform functions for which you are not trained. Instead, find talented people to fulfill these important roles so that your business can move forward. And then, after you find these qualified people, require these individuals to each present you with a precise, comprehensive, step-by-step guide for building the marketing and management infrastructure of your business over a six month period. Then take these plans for your new marketing department and distribution department and combine them with your own Technician plan for how to create a system to manufacture and assemble the high quality product that you are going to sell. This will result in an integrated set of systems that will allow you to “move forward” with a solid infrastructure in place after only six months. Now that’s a real business plan!

Next week, I’ll concentrate on defining the content of each of these detailed infrastructure plans, so that each of the three essential role functions we’ve discussed can be fully integrated into your business in very specific, concrete ways.

Need More Help?

For over 20 years, our experienced attorneys at DregerLaw have assisted hundreds of business owners throughout Chicago and Northern Illinois. We can help you as well. Call us at 312-322-0955. Or follow this link* so that we can guide you on your legal rights as a small business owner.

*  The use of the information on this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship.

AVOIDING SMALL BUSINESS DISASTERS: CHOOSING YOUR BUSINESS ENTITY

Make Informed Choices...

It’s not easy to be a small business owner. There are many pitfalls that you often can’t see until it’s too late. The good news is you don’t have to fall victim to these difficulties. If you’re proactive in preventing some of the most common problems, your business could easily sidestep potential disasters.

Over the years, I’ve seen plenty of visionaries form small businesses without considering protective measures. They select a business entity without understanding that their choice affects: (1) their exposure ( or non-exposure) to claims of third parties; (2) their ability (or lack of ability) to control the management of their company; and (3) the operational costs and tax amount that their company will pay.

In this blog, I will discuss the perils of choosing the wrong business entity and the benefits of making an informed selection, so your company can thrive without risk. The bottom line is that while there are a number of business entities from which you can choose, it is important for you to be aware of the distinct advantages and disadvantages of each entity. For most businesses, the entity choice will be a corporation.

Choosing Your Business Entity

But, before I get ahead of myself, let me first explain the different business entities. They include:

*   Limited Liability Company (LLC)
*   Sole Proprietor
*    Partnership
*   Corporation

LLC

The LLC is a popular choice that is often recommended by accountants. It is essentially a blend of a corporation and a partnership. Its benefits are that it provides the liability protection (i.e. “corporate shield”) of a corporation and the tax benefits of a partnership. But its disadvantages are significant and outweigh the benefits.

To start, LLCs have only been in existence for about 40 years, which means that there is a limited amount of case law to which a court can refer when dealing with LLC disputes with third parties or among its own member-owners. This means that determining how a court will enforce the rights of the LLC and its members is unpredictable. Secondly, LLCs are expensive to create (the legal cost to create proper organizational and management documents can exceed $2,000, plus a $750 filing fee) and costly to maintain ($300/year). In short, LLCs should be avoided unless you have complex tax issues that your accountant can demonstrate are best served by using an LLC.

Sole Proprietor/Partnership

Given the pros and cons of the LLC entity, you might think the sole proprietor or partnership options fare better. They do not, as these entities have imbedded problems as well. For example, neither a sole proprietorship or a partnership provides protection against third party claimants or creditors. Moreover, the 50/50 structure means that each partner has 100% veto power. This means that neither party has the right to make a unilateral decision, even if it’s in the best interest of the business. Thus, neither the sole proprietorship or the partnership should be considered a safe or practical choice for your business entity.

Corporation

This leaves us with the final business entity: the corporation. In Illinois, corporations have existed for over 145 years, thereby providing a wealth of case law on which courts may rely when enforcing the rights of the corporation and its shareholders, director, officers and employees. This provides predictability in evaluating the rights and liabilities of the corporation and its owners and eliminates the gray areas otherwise experienced with LLCs.

Secondly, corporations are relatively inexpensive to form (i.e. $400 legal fee to create corporate book, minutes and resolutions plus a $275 filing fee),  and very affordable to  maintain ($100 annual filing fee).

By mindfully choosing your business entity, you’ll be looking out for the long-term health of your company. Then, when you move forward, you can do so with confidence and peace of mind.

Next week, I will discuss the mechanics of “moving forward,” and the myth known as the “business plan.”

Need More Help?

For over 20 years, our experienced attorneys at DregerLaw have assisted hundreds of business owners throughout Chicago and Northern Illinois. We can help you as well. Call us at 312-322-0955. Or follow this link* so that we can guide you on your legal rights as a small business owner.

*  The use of the information on this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship.

Learning to Drive Your Business By Keeping Both Hands on the Wheel

According to the U.S. Small Business Administration (SBA), the nation’s number of small businesses has grown 49 percent since 1982. This means more and more people are leaving the traditional workforce to create their own companies. Instead of carrying out someone else’s goals, they’re turning their visions into a working entity.

But in order to fulfill this dream, the SBA advises aspiring owners to create a clear business plan that includes:

*  A compelling story about your business;

* Specific objectives and goals with general parameters to guide the organization; 

*  Logic and discipline; and

*  Regular updates.

Still, succeeding as a small business requires more than just a general plan. Michael E. Gerber, author of The E-Myth Revisited, believes 3 active roles must be integrated into the small business for it to work:
A Visionary: This person must establish the business’ goals.
A Manager: This leader is in charge of enforcing logic and discipline rules.
A Technician: This worker must perform the skill of the business.

While it’s always smart to examine the components that make a small business function well in the ideal world, the reality may be far different. For example, as the business owner, you might easily feel more frustrated than you ever did as an employee. This could be because you’re now forced into the roles of Manager and Visionary, but you’re unqualified for either job.

Gerber identifies this conflict as something that happens when a business founder is really a technician at heart and doesn’t have an entrepreneur’s outlook. That can be a terrible problem and may lead to major conflicts deriving from one, simple thing: ignorance. When you’re in an essential position that is beyond your normal capacity, your business could seriously suffer.

As a commercial attorney, I’ve seen this troubling cycle happen over and over again to business owners with the best of intentions. But there is hope for reversing these unwise abdication practices. The “cure” is to create a competent, professional support system and then delegate work without giving up the responsibility of running your company.

You can’t do everything to operate this business. That’s why hiring talented people to carry out your vision is key. But don’t disappear. You still need to be involved in all aspects of your business to help it thrive. With an open mind and a willingness to trust good employees, you’re on your way to success.

Need More Help?

For over 20 years, our experienced attorneys at DregerLaw have assisted hundreds of business owners throughout Chicago and Northern Illinois. We can help you as well. Call us at 312-322-0955. Or follow this link* so that we can guide you on your legal rights as a small business owner.

*  The use of the information on this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship.