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Welcome to the Law Office of Randall K. Edwards, PLLC. Members of the firm, with main offices in Salt Lake City, Utah, practice law in Utah, Nevada, California and Arizona, and in the country of Brazil, in areas of business law and litigation, personal injury and medical malpractice, immigration, and asset protection and estate planning.

 

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BUILDING AND MAINTAINING A FIRM FOUNDATION FOR YOUR BUSINESS

About 10 years ago, I had an office on the 15th floor of the old Key Bank Tower in Salt Lake City (now demolished as part of a downtown redevelopment project).  It overlooked Temple Square – the historic and beautiful center location for the Mormon church – as well as all points north.  Between the flower gardens in the spring and summer, and the holiday lights in the winter, I had a dazzling view of one of the most beautifully striking places in town.

From my vantage point, I could also see the construction of a planned LDS (Latter-day Saint, as Mormons are often called) conference center, which began in 1997.  The building, projections of which were impressive, promised to be the largest indoor religious center of its type (it was to seat nearly 22,000 people).  It was to be stunning both in its architectural soundness and in its outward appearance.  More impressive was the ambitious construction timetable projected for the building – a little over three years.  Daily, between phone calls and client visits, I would look out the window to watch the progress on the undertaking.  I prepared to be amazed.  I wasn’t – at least not for a long time.

The problem, as I saw it, was that nothing of any real value appeared to be happening on the construction site.  It was true that there seemed to be quite a lot of digging, since the bulk of the building’s indoor capacity would actually be below ground level, but other than what looked to me to be a lot of busy work with earth movers and a couple of cranes (one of which almost toppled over in a freak downtown tornado), it didn’t look to me like much progress was going forward. Almost two years passed in which I didn’t see a single wall go up, nor did I see any of the local granite (from the same site that had supplied the stone for the impressive Salt Lake Temple more than 100 years before) make an appearance on the scene.  It was all a rather unimpressive hole in the ground, as far as I could see.

I mentioned this to a friend of mine in the construction trade.

“Just you wait,” he replied.  “They’re putting in the most solid base you ever saw.  The rest of the building is going to look like it went up overnight, compared to the foundation they’re building for this thing.”

“But why is it taking so long for any progress to be made?” I asked.

“There’s an incredible amount of progress here,” he replied.  “You just can’t see it – in fact, you’ll never see it – but it will be the structure on which everything else will rest.  This building is going to last for a thousand years.”

And he was right.  It seemed that once the walls started to go up, the rest of the conference center was finished in a matter of just a couple of months, complete with over three acres of grass and gardens on the roof, and a waterfall on the side of the building.  The building’s interior is equally impressive.  Every seat in the place has a straight view of the stage, and I swear you could land a couple of 747s in there.

I’ve been in the building a number of times, and it never fails to impress me.  The architecture is attractive, the artwork is awe-inspiring, and the layout of the building is fantastic.  But my contractor friend is right.  I can’t see the foundation of the building – the concrete, the steel trusses or the rebar.  I don’t look at the wiring or the plumbing.  I don’t see the incredible air pump that powers the amazing pipe organ.  I usually just stand inside the structure with my mouth open, staring at the ceiling and wondering how they did it all so fast.  All of the nitty-gritty details are hidden, and would probably be lost on me anyway.

I was thinking about this during the last couple of weeks, when a client came to me with “just a few questions” about his latest start-up venture.  It seemed that he was the brains behind a new invention and his partner was the money guy.  They’d started a company that seemed to have a bright future, had made quite a bit of money in a short time domestically and now wanted to expand into some international markets.  They had built, for lack of a better analogy, a pretty impressive-looking building.  It was only when I started asking the inventor partner a few probing questions that it became clear that they didn’t have much of a foundation, however.

I started out with some easy ones.

“Where is your company established?”

“Uh, I’m not sure.  I didn’t really handle that part of it.  I think, maybe Nevada … or California.”

“Is the company a corporation, a limited liability company, a partnership?  How is it structured?”

“I’m not sure, but I think it might be a partnership, or maybe a corporation.  I know that I have a half-interest in it, though.”

“How do you know?  Do you have a copy of the partnership agreement, if it’s a partnership, or a copy of the operating agreement if it’s a LLC, or a copy of the bylaws if it’s a corporation.”

“Uh, I’ve never seen that stuff.”

“Who owns the patent to your invention?  You or the company?”

“Well, I think it’s probably in my name, but I know that my partner said that he might apply in the company’s name.”

Things only got worse as my questions got harder.  The client didn’t know who had registered the website for the company, wasn’t sure if an international patent had been secured, wasn’t sure who the international distributors were (or if they had written contracts), couldn’t tell me if there what the company’s total assets and liabilities were, and didn’t know if the people doing the company’s work were employees or independent contractors.  He couldn’t tell me if the money he’d been taking from the company was salary or considered a loan (he had neither loan documents nor W-2 forms).  He did know of a possible legal claim against the company, stemming from some promises that had been made to some third-party outsiders, but didn’t know if there was anything in writing anywhere that might give the company problems.  The more I asked, the more frustrated and, ultimately, angry, he got.

“I’m not sure all of that is all that important, is it?” He finally blustered.  “After all, we’re making a ton of sales.”

“What, exactly, is your title in the company?” I finally asked, figuring that since he was the inventor partner (at least I thought he was probably a partner, although he wasn’t sure), he had an excuse for not knowing all of the business details of the company.

“I’m the CEO/President,” he announced proudly.  “I’m the guy who’s been making all of the decisions.”

I swallowed hard, and tried, as diplomatically as I could, to tell him that his company could well be heading off a cliff.  Unless I could figure out what the company’s legal and financial foundation was, I wouldn’t be able to tell him whether he was sitting in a mansion or precariously perched atop a house of cards.  The fact that he didn’t know was alarming.

As egregious as my new client’s situation was, I wish I could say that it was atypical.  Unfortunately, in my 26 years of practice, I’ve run into an awful lot of folks just like him – guys who want to start building their business castle from the roof down, without ever having taken the time or expended the money to put in a rock-solid legal and financial foundation.  Unfortunately, most of those clients came to a sudden and bad end, either ripped off by unscrupulous business partners (or third parties), drowned in a torrent of legal claims, or crushed under a load of bureaucratic requirements from state and federal agencies, often involving the IRS or state tax authorities.  Often, it isn’t just the client’s business that goes under.  Instead, because of a failure to have adequately protected themselves from the consequences of their bad business judgment, they’ve lost their houses, their cars, their livelihoods and their marriages.  Usually, by the time they get to my office, they’ve started to circle the drain, and it’s up to me to assess their situation and tell them whether they might have enough momentum to swim away from trouble or whether they’d better just hang on as best they can while they’re sucked into the undertow.

So, how does a new entrepreneur or small businessman lay an adequate business foundation – one with real structural integrity?  Here are five suggestions (with a bonus thrown in for good measure):

First, decide what you want.  How big do you expect your business to be?  How many participants are you going to have in this business?  Who is going to be in charge?  Do you have partners?  Do you trust them?  Where do you think this business is going to be in five years?  In one year?  In three months?  It’s important to have a vision of what the business is going to be, set some very specific goals, and then measure your business’s progress against those goals.  In deciding what you want, it’s important that you understand all of the nuances and specifics relating to your business’s needs.  You can’t afford to leave anything to chance.  Decide early what the ultimate destination of this business should be, and then lay out a detailed roadmap for reaching that destination.  Include every contingency, every risk, every potential problem, every strength and every weakness.  Good, successful businesses don’t simply happen by accident.  They are well-planned and well-executed entities.

Second, get professional help.  If you can’t afford to get a good lawyer and a good accountant to help you put together and carry out your business, you probably can’t afford to be in business for yourself.  A few hours and a few hundred dollars with a professional who can advise you as to how to put together your corporate articles (or operating agreement); your contracts with suppliers, distributors or representatives; how to do your tax filings (and when), how to comply with your state’s worker’s compensation laws; and how to structure your loan and debt documents, will save you an immense amount of time, expense and hassle.  Don’t make the mistake of thinking that you can organize your life’s entrepreneurial dream on the cheap, with a bunch of forms you downloaded from the Internet, some advice from a friend who thinks they know how to do it, and a book you picked up at the local thrift store on starting your own business.  You should no more try to put together and undertake your business by yourself than you should do your own brain surgery.

Third, ask questions.  Hard questions.  What will happen if things begin to fall apart?  Who’ll be on the hook?  What if my partner decides to split?  Is my intellectual property protected in Romania?  What if my competition rips off my idea?  My suppliers?  My workers?  What if I get sued?  Do I have enough insurance?  Should I be pre-paying my taxes?  Do I know what I’m doing?  One of the most common folks I run into is a “pie in the sky” entrepreneur who’s got a “killer idea,” a lot of optimism and a blind faith that everything will somehow work itself out with enough enthusiasm.  There’s no idea about what could go wrong, or what will happen if it does.  When things do go wrong, (and inevitably something goes wrong), this intrepid dreamer is clueless as to what to do and where to turn.  And they often flame out in a dazzling crash.  The time to deal with problems is before they happen.  The time to ask the tough questions is before you’re stuck with a massive headache at three in the morning, when things have started to turn bad.

In this regard, I’ve been accused of being the guy who, after the battle is over, walks around and shoots the wounded.  To some degree, it’s true.  I believe that there is a point where every client needs to face the possibility – in fact, I insist that they consider it a probability – that everything will fall apart … the business will find itself on the rocks, the owners will be sued, the business’s secrets will be compromised, and there will be no one to turn to for help.  I ask them to consider whether, in such circumstances, they would know what to do, what their rights are, and who to turn to.  They don’t usually like those kind of questions.  It’s a lot like sitting down with a couple that’s about to get married and then asking whether they have considered whether their prenuptial agreement is in place, and what will happen when their marriage ends in a bitter, ugly divorce.  Nonetheless, it is exactly those kinds of questions that will keep the client out of trouble.  Businesses aren’t like marriages, of course … at least, not exactly (although I’ve seen some partnerships that broke up in a far more brutal and emotionally devastating way than any marriage ever could).  A good, clear-eyed look at what might happen in the event the business falls into trouble can only help make the business a success … and avoid massive problems if it isn’t.

Fourth, know what your documents say.  Understand what your corporate bylaws (or your limited liability company’s operating agreement – or your partnership agreement) says about how your business is to be done – how, for example, ownership interests are transferred, or what prerequisites must be met before a partner or owner can be ousted from the company.  Know who can write checks on the company’s account, what your contractual rights are with your company’s representatives, and what your debt obligations are (including personal guarantees).  Understand, for example, whether it’s you or the corporation that owns the intellectual property utilized by the corporation.  Know whether and where you can go to court in the event of a legal issue (as opposed to arbitration), and know whether you can recover attorney’s fees if you prevail in a lawsuit.  Read your contracts; review your insurance policies; look at every paragraph.  Know where your documents are located.  Keep them close and keep them safe.  There’s no detail that you shouldn’t know.  Remember, when it comes to the documents that will define your business (and, by extension, your life), there’s no such thing as “boilerplate,” “legalese” or “fine print.”  It’s all important, and it’s all something that you should know and understand.  No one should know or care more about your legal rights and responsibilities than you do.  Don’t figure that someone else knows and understands all of that “legal stuff,” so you don’t need to.  Someone else often does – someone who’s on the other side of a bitter legal battle.  Knowledge is power in business.  Don’t give that power away to someone else because you were either too lazy or too busy to read your documents.

Fifth, follow the rules.  In order for you to take advantage of the corporate (or limited liability company) protections afforded by the law, you need to make sure that you comply with the legal requisites that pertain to that company.  You need to actually have your shareholder meetings, (complete with appropriate minutes), vote on and record corporate resolutions for important business decisions (such as purchasing a large piece of equipment), keep track of the company’s debt obligations, and make sure you “paper” all of the company’s business with appropriate documentation.  It is of enormous importance to avoid commingling your corporate funds with your personal funds.  Have a separate checking account – and separate credit cards – for your business.  There’s no quicker way for somebody who’s suing your company to jump through the corporate veil and into your personal pockets than to be able to show that you didn’t follow the rules – thus rendering your company an “alter ego” of yourself, which means you can’t avail yourself of the “corporate veil” protection afforded under statutes and case law.  You can no more afford to ignore your ongoing obligations to comply with your business’s legal requisites than you can afford to drive your car without changing the oil.  There are specific rules you must follow if you are going to be able to protect yourself.  Learn those rules and apply them, every day.

Finally, if your foundation is weak, fix it now.  If, in looking over the above suggestions, you’ve discovered that perhaps your company’s legal foundation isn’t quite as strong as it should be, fix it now – before trouble comes.  If, for example, you haven’t had a corporate meeting in years, today is the day to schedule that meeting.  It will be far too late to try to try to repair that problem and wrap yourself in the corporate veil after you’ve been sued.  If you’ve been buying your groceries with your company’s credit card, today is the time to stop.  It will be too late to convince a court that commingling didn’t really matter from the witness stand.  Talk to your lawyer and your accountant today.  Fix it now.

As I said at the outset of this article, there’s nothing particularly interesting or engaging about digging, pouring and reinforcing the foundation to any building.  In fact, it’s boring, and it’s certainly not showy.  Without a firm foundation, though, it really won’t matter how pretty the rest of the building may be.  When things start to go bad, it will come tumbling down.  The same is true of your business.  Without a strong legal and financial base, there’s a good chance of collapse.

Randall K. Edwards practices law in Nevada, Utah, California and Arizona, with his primary office located in Salt Lake City.

 

 

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