- Sam Blink is a managing attorney at Blink Law, LLC.
While the Great Resignation has resulted in a record number of people quitting their jobs, the number of people starting businesses is also on the rise.
About 5.4 million new businesses filed tax documents in 2021, representing a 55% increase from pre-pandemic figures in 2019.
As a lawyer specializing in business planning and business structure, my advice to new entrepreneurs is to focus on how to protect personal assets and think about your long-term growth strategy.
Three ways to do this are:
- carefully draft your operating agreement,
- be careful not to lose an LLC status and
- pay your appropriate amount of business taxes.
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How to write your operating agreement
If your business has multiple owners, it is important that the terminology in your operating agreement takes into account the voting power of majority and minority owners in different situations.
Minority owners should negotiate certain business decisions, such as changing the agreement itself, which require their approval, and majority owners should determine when they want the right to make decisions more independently, such as with rights to “drag” in a sale or merger.
When planning for a potential buyout, you should also be careful about the use of the term “market value” in an operating agreement. Generally, “market value” refers to the value of your percentage ownership if you were to market the business for sale; but the market value is often less than the “true value” or book value of your percentage interest.
The choice of words can mean tens of thousands of dollars of difference.
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How to maintain your LLC status
Many business owners understand the value of registering their business with the state and protecting personal assets by creating a limited liability company or LLC.
However, not all business owners know that you can lose your limited liability status and become personally liable for business debts.
There’s a long list of things a court will look at to determine if you can benefit from your limited liability status if you and your business are sued, but one of the main ways a business owner can lose their limited liability status is to ask a court to determine whether he commingles personal funds with business funds.
So, apart from being the right thing to do, separating your business and personal accounts is something you should do to protect your personal and family assets.
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Make sure you pay your business taxes
You may know that paying your business taxes is important, but you also need to know the penalties for non-payment or the appropriate amount.
Generally, non-payment of taxes involves receiving a late payment penalty of 10% to 25% with interest. If you are unable to pay your business taxes, it is also possible that the government will put a lien on your property or that the bank will charge you, which means resetting your bank account without notice.
While none of these scenarios seem fun to think about, they are crucial to consider. In my practice, I help contractors draft or review their operating agreements and obtain their state registrations and federal EINs.
Although the cost of legal services varies depending on the size of the law firm and the complexity of your business structure, hiring a lawyer who can help you set up your business and review contracts is an investment that protects your future income.
As a small business owner, I sympathize with entrepreneurs who want to grow their business and reduce overhead and expenses.
If you are one of the many new business owners who have started a business in the past couple of years, I hope these early years of your business will be the first of many successful years to come.
Sam Blink is a managing attorney at Blink Law, LLC, where his practice consists largely of corporate transactions, mergers and acquisitions, and contract drafting and negotiation. For more information, visit blinklaw.org.