Welcome back to part 2 in our series on common themes and pitfalls that create problems for business owners. Many businesses set themselves up for failure from the beginning, so this blog series is aimed at new businesses. Through being proactive in your business planning, your business can avoid many issues which could cause great expense and stress down the line. Let’s examine the final three mistakes in this second post:
Failing to Plan for Conflict
Some business partners approach conflict like lovestruck teenagers talking about the future. Business owners often do not discuss how they will resolve conflicts at all, or if they do, they assume that any conflict will be easily resolved. This is simply not the case; conflict between business partners is inevitable. Having good conflict resolution mechanisms can mean that the business dispute does not kill a friendship or the business in the process.
Since it is inevitable that business partners will disagree, there needs to be a built-in process for resolving the dispute without sabotaging the business. Not only do you want a way to resolve disagreements when you are talking to your business partner but you need to provide for ways to resolve conflict when the communication has totally broken down. Lawyers earn far too much of their money in disputes when business owners completely stop communicating with each other.
The best practice is to have several conflict resolving mechanisms in place. Conflict resolution mechanisms are often highly technical and well worth the investment in sound legal counsel to ensure the mechanisms function as needed. By addressing the problem and the solution up front, while everybody is presumably getting along, you can ensure that the business can move forward despite an impasse between the owners.
Ignoring Corporate Documents
Many business owners never consult their governing documents after they sign them. The operating agreement and bylaws are far too often set on the shelf until they are needed to resolve a conflict. This is problematic on two levels. First, many conflicts are avoided altogether simply by practicing what everybody agreed to do in the first place. Second, when businesses do not follow the business agreements they set up a potential lawsuit based on the principle of mutual departure from the contract terms.
The best practice is to decide how you want to run your business and set up your documents to reflect your business practices. For example, if you want to be able to have certain board meetings over the telephone, tell your lawyer to provide a way to authorize phone meetings in your operating agreement. If you want to allow email voting to authorize certain types of routine actions for your business, tell your attorney and have them add a provision that permits for email voting in lieu of formal meetings. If you do not do this, chances are you will eventually end up running your business how you want to run it, no matter what your corporate documents say. This weakens your position in the event you ever need to rely on those same corporate documents to protect yourself.
Lacking Imagination and Creativity
Many business owners have fairly rigid views of what their options are in terms of capital funding, profits, and investment streams. Business owners should approach their business structure with the same degree of ingenuity that they apply to the rest of their businesses. For instance, sometimes it is better to set up your capital contributions as a loan with a promissory note that must be repaid as opposed to a capital expenditure which is not entitled to repayment. Structuring your investment as a loan to your business can have tax advantages for both you and the company which you should discuss with your CPA. Another option to keep in mind is holding companies for your business which can allow you to move profits from one company to another investment opportunity with greater ease. There is no one size fits all answer and the key to maximizing your business’s performance is to define your goals and ask your lawyer to help you be creative in how to achieve those goals.
Set your business up for long-term success by avoiding these common mistakes. If you need professional business planning or legal support, our team at Foster & Smith is standing by to offer support.