Category Archives: Corporate formation, governance, dissolution

Can Your Business Avoid a Pearl Harbor?

Pearl Harbor Day is approaching.  The Japanese Imperial Navy burned that day into US history with the sneak attack the naval yards and airfield in Pearl Harbor, Hawaii.  Historians have written volumes about the warning signs the US had leading up to the attack.  The Japanese planes may have flown into the teeth of a prepared defense on December 7, 1941 had the US paid more attention.

You and your business should take action to avoid a surprise attack.  Here are potential areas of concern.

  1. Financial Controls. Do you have adequate financial controls and oversight over those who have access to the business bank accounts and credit cards?  Do have or need employee dishonesty insurance coverage?  A standard liability policy may not cover theft or embezzlement by your employees.  All it takes is one dishonest employee to do significant damage.  The better your controls are, the more likely you will deter wrongdoing or detect a problem earlier.
  1. Confidential Data. Confidential data comes in many forms, be it your trade secrets, your employee’s or customer’s private data (social security numbers, medical records, etc.), or bank account or credit card information.  There are federal and state laws covering much of the data on when/how you need to protect the data, and how to act if you have a data breach.  What do you have in place?  Ignoring the issue can cost far more than paying after the damage is done.
  1. Customer Contracts. Do you use contracts with your customers?  It does not matter they are one-page documents, the text on the back of an invoice, or multi-page tomes.  It makes sense to review them on a regular basis for updating, check for compliance with any applicable state and federal laws, and so forth.
  1. Employee Contracts or Policies. “I don’t need no stinking contracts with my employees” you may say.  Maybe – maybe not.  Do you give employees the company credit/debit card?  Do you allow employees to use their personal smartphones or other devices to access company data or email or cloud accounts?  Do you have trade secrets to protect?  Can you use a non-compete?  Do you have a sexual harassment policy?  It is better to get these in place before the proverbial horse gets out of the barn.
  1. The Corporate Book. I am referring to the bylaws, operating agreement, partnership agreement, and so on.  How well are they working out?  Have you deviated from them and need to return?  Do you need to revise them? Keeping these in order will help if you have a dispute with your other owners or have an audit.

These are but some of the areas where preparation can do wonders for a business.  Take the time to reduce the risk of your business suffering a Pearl Harbor that could sink your business.  Please contact us to assist you in this process.

New Year – New Tax Laws – New Headache?

The year 2018 saw the implementation of the Tax Cuts and Job Act (“TCJA”).  There are a myriad of changes to the federal tax code – just ask your CPA.  One question to ask is whether it makes sense tax-wise to keep or change how your business is taxed.  Your CPA and lawyer can help with that decision.

The CPA’s Role Your CPA should guide you on how the TCJA affect your business, and whether any changes need to be made.  The changes could include a change in tax status.  You may have elected to have your business taxed as an S-Corp, for example.  Maybe it makes sense to keep that, or maybe it makes sense to change its status to a C-Corp.  Be careful when making the decision based on what a colleague did or what someone wrote online.  What may work well for Jack’s business may be a disaster for Jill’s business. 

Keep in mind that there are short deadlines if you want the change to be retroactive to January 1, 2018.  Have more than one owner?  You may need everyone’s signature to effect a change.  Delay may not be your friend.

The Lawyer’s Role:  Need to make a change?  Changing entity status or tax status, or both?  Your lawyer can help guide you on what obligations you have to involve any co-owners, how to properly give notice, and how to take and record a vote.  Ignoring that may invite an angry letter and/or a lawsuit by a co-owner, for instance.  There could be other legal ramifications based on what agreements your company has in place.  Do your due diligence – avoid being penny wise but pound foolish, as the old saying goes.  

Starting a New Entity? The same general advice applies.  Speak with your CPA about the tax advantages/disadvantages of your choice of entity and tax status.  Speak with your lawyer about the legal aspects.  

How About DIY? Many states make it easy to do the bare bones to create an entity.  Some states make it just as easy to file to change an entity, such as converting an LLC to a corporation.  There is more that the DIY-er should consider.  What obligations do you have with your choice of entity?  Should you have a partnership agreement, shareholder agreement, bylaws, operating agreement, buy/sell agreement, subscription agreements, and so on?  Which one is the right fit for the entity?  What should you have or not have in those documents?  Done well, those documents can memorialize what everyone agreed to, provide guidance if there is a dispute between the owners, and maybe help if you get audited by the tax authorities.  Done poorly, you risk a harder and more expensive mess that helps your lawyer buy a brand new luxury car.

There are those who can handle all this themselves quite easily.  For the rest, get the right help at the right time.  Your peace of mind and pocketbook will thank you.