By: Tim Singhel
You have grown your small business from entrepreneurial dream through financing to fruition. You have nurtured it through early growing pains, expanded your client/customer based and achieved long-term sustainability. You have evaluated your market penetration and capitalization. After much thought, business consultation, possibly some sleepless nights and even some prayer, you have decided to expand. In preparation for that, you have met with your financial advisor/banker, your accountant, your trusted business advisors and mentors, and revised your business plan to accommodate your expanded vision and growing platform. Have you applied the same rigor to your legal strategy?
All too often, entrepreneurs have overlooked that critical puzzle piece leaving them and their business ventures challenged, or worse, failing, when the inevitable headwinds start to blow. The same corporate structure, legal precautions, employment policies and social media strategy that got you going may not be what you need to propel you forward.
Here are a few areas that you should keep in mind and consider discussing with legal counsel.
1.) Corporate Structure and Equity Ownership – The formal organizational structure of your business depends on your needs. Those needs are now changing as you are growing. There may be differences in the law depending on where you are located, but generally speaking there is a trade-off depending on the form you choose. For example, a subchapter S corporation might best fit your needs if your primary concerns are employment taxation issues. However, a LLC might do the trick if you are more concerned about operational ease and flexibility. Further, now that you are growing, you may be bringing on new investors and/or high level employees and business partners who want an equity stake in the company. How do you accommodate that? Can you do that with your current structure? Do you want them to have a say in the operational decisions of the business? Do they get a vote at corporate meetings? These and other related decisions can be addressed with a revised corporate formation agreement, perhaps along with a private placement or other equity granting instrument. Do not just rely on where you have been and what got you here. Think about where you are now and where your business plan will take you in the future.
2.) Legal Precautions/Compliance – Sometimes a business expansion goes along with an introduction into new markets, be they different states, across the border, into different business segments, or now your business is large enough to be covered whereas you used to fly below the radar. All of those options may involve new regulatory, legal, and trade frameworks that need to be addressed. Finding yourself cross-wise with a regulatory or legal framework, or a trade agreement or custom that you did not anticipate can have disastrous consequences and possibly even kill your business. Make sure you know the rules of the road and have the proper tools to navigate around the potholes, construction zones, roadblocks and speed traps you may be facing. A robust compliance strategy may be expensive but it is far less costly, both in terms of money and your time, than dealing with a compliance issue with a governmental entity or a lawsuit from a disgruntled customer or competitor.
3.) Employment Policies – A growing payroll goes hand in hand with an expanding business. They make it up as we go along/catch as catch can method of operating may have been just fine when it was just you and your family and/or long-time business partners or friends in the office, all of whom knew each other already. Now you are bringing people into the mix whose first connection with you and each other is their jobs. Setting the ground rules is as important with your new colleagues and co-workers in the office as it is with your family at home. Just like good fences make good neighbors, good employment policies help ensure that offices run smoothly and fairly. If you operate on a whim you have at least two problems. First, you are setting an example as a leader that your new colleagues are more likely to follow. Second, you are laying the groundwork for someone to feel as though he or she has been treated differently and unfairly given a similar set of circumstances. You know what? Oftentimes, they are right. Yes, there are exceptions that need to be made at times but that can only happen if a good set of rules is in place at the start. It is never a bad idea to sit down with your legal advisor for a discussion about what works well in your office and what behaviors should be encouraged in order to propel your business forward. Armed with that information, your legal advisor can work with you to help you create a set of policies and expectations that will set the right tone and form the basis of your corporate culture. On a related note, if you are thinking, “well, I do not have to worry about that because I have 1099 independent contractors not W2 employees on my payroll” then think again. Now you just also have to worry about whether those folks are really operating as contractors or they are really employees that you are not withholding taxes for, paying benefits for, covering with your insurance, etc. Similarly, if you have enough employees you now have to also concern yourself with a company benefits strategy that is compliant with the Affordable Care Act, i.e. Obamacare.
4.) Social Media Strategy – Whether it is formally blogging, using twitter, encouraging your employees to have a social media presence, creating a customer portal for your website, or even just simply having a website, social media is a powerful tool that can be used to achieve fabulous results for your business but can also have equally disastrous consequences. There are a host of issues to keep in mind.
• With a website and/or social media presence, you need to ensure that your intellectual property rights are protected and that you are not violating the rights of others. For example, if you are using any images on your website then you are using them for personal gain. Are they your images to exploit that way or did you get any of them off the internet without doing a full check to see if anyone else owns them?
• Creating a social media presence, especially using tools such as Twitter, Facebook or Instagram run the risk of you losing control over your content. You also need to be careful not to create and post something in haste that soon afterwards you wish you could take back. A related issue is that trying to control the social media postings of non-supervisory employees is a tricky thing, especially these days. The National Labor Relations Board has taken the strong view the last few years that all non-supervisory employees (i.e. all those covered by the National Labor Relations Act and the Labor Management Relations Act – not just those who work in union shops) are permitted to make negative comments about their employers, even in public online forums, and that any policies an employer might put in place that place blanket prohibitions to engage in such concerted activity violate the law. The only limitations on that right are if the negative comments are directly harmful to individuals or violate the employer’s intellectual property rights. Keep in mind, though, the definitions of “harmful” and “violating the employer’s intellectual property rights” are construed narrowly and the scope of the activity that the law protects is construed very broadly. Accordingly, any employer who tries to discipline an employee for negative social media posts could soon be facing charges not only for the discipline but also for the underlying policy as well.
• Lastly, one of the other considerations relates to having a customer portal. That can be a great tool for driving your business development and engendering customer loyalty. Be sure your privacy protections and data security protocols are up to date though because breaches are becoming increasingly common. You have to be even that much more careful if your business involves personal healthcare information (phi) because that type of information is given a number of special protections by the Healthcare Insurance Portability and Accountability Act (HIPAA).
One last thought – you expect your banker, your accountant, any business consultant and any outsourced service you engage (e.g. IT or HR) to be a trusted business partner. Why should your outside legal counsel be any different? Many lawyers are service providers. They help you put out fires and then repeat the process with their next clients. The best ones do a fantastic job at it too. However, some corporate transactional/advice counsel act like true business partners. They sit down with you and help you figure out why those fires are starting in the first place. They help you advance your corporate mission, grow your company, plan your business strategy and even develop your human capital, the most important asset of your business.
As each situation is different, it is best to consult with a legal advisor.
Tim Singhel focuses on outside general counsel work, corporate/business and labor & employment law in the Nashville office.
This blog contains general information about legal matters. The information is not advice, and should not be treated as such. Communication of information by, in, to or through this blog and your receipt or use of it: (1) is not provided in the course of and does not create or constitute an attorney-client relationship; (2) is not intended to convey or constitute legal advice; and (3 is not a substitute for obtaining legal advice from a qualified attorney.