Do You Understand Your Role?

I recently met with one of my clients for the annual business meetings of their company.  As I visited with different members of the Board of Directors before the meeting, I grew curious about the level of understanding that many of them had regarding their roles as directors and shareholders.

As I observed the participants during the meetings, it became quite clear that they had minimal experience with Corporate Formalities and overall Corporate Structure.  During the lunch recess I inquired with two or three of them as to whether or not they understood the differences between being a director and shareholder and what their responsibilities were.  I was met with blank stares and the ultimate responses were "I have no idea".  I then asked if they had ever read the Corporation's ByLaws, and the answer was a unanimous "No".

While this may seem unlikely to many of you, it is actually quite common.  There are a number of businesses that consist of Directors and Shareholders that have no real understanding of Corporate Structure and the Corporate Formalities that are required of them (this is especially common in the world of Nonprofit businesses).

It is my opinion that many people view serving on the Board of Directors of a Corporation, whether it be Forprofit or Nonprofit, as a privilege and a great opportunity.  While that certainly can be true, it is also an enormous committment that comes with great responsibility.  Sadly many people accept this responsibility without doing the necessary due diligence to understand their fiduciary responsibilities to the organization, nor the substantial liabilities that they inherit when they accept the position.

If you are serving on a Board, or considering that prospect, my recommendation is a simple one.  Request all of their Corporate documents so that you can understand the structure of the Corporation, what the ByLaws require of you, and the fiduciary responsibilities that you will be accepting...

Piercing The Corporate Veil - Revisited (Part 2)

I published an article a few weeks ago that was centered around Piercing the Corporate Veil and while I did share quite a bit of information at that time, I also promised to share more in future posts.  Based on some recent conversations that I have had with new clients and some trusted advisors from my contact sphere, I think now is a great time to revisit this.

In my previous article, I shared a number of areas that can place a business (and its owner) in serious jeopardy if they are not properly addressed.  I would like to take a few minutes today to expand on some of those areas...

• It is not uncommon for a business owner to overlook some key management aspects of the business, particularly so in closely held small businesses.  Designating proper officer titles and ensuring that each officer is fully aware of his/her roles and responsibilities is crucial.  I recently heard about a small business owner who found himself in a fair amount of legal trouble because he had created a number of "shell" businesses for various real estate and investment ventures, reflected his wife as an officer and governor, and in some cases had her listed as the sole owner of the business.  The problem is that his wife had no idea how many companies existed, nor was she aware that she was an owner/officer in many of them.  Ultimately, the LLCs were peirced and it cost the business owner a substantial amount of money.
• Mismanaging or commingling funds is another common mistake.  I cannot tell you how many times I have encountered small business owners who pay personal expenses from their business account and believe it doesn't matter or is justified because they are the sole owner.  Not only is the business owner blurring the lines between what is legal and ethical with practices that may not be legal or ethical, buth they are also setting themselves up to have their Corporate or LLC Veil pierced.  The whole purpose behind creating an entity is to demonstrate separation between business and personal activities and create a liability shield for the owner and their personal assets.  Paying personal expenses from the business account is basically disregarding that separation and exposing the business owner personally.  It could also lead to tax avoidance issues if the business owner is attempting to "write off" personal expenses by paying for them through the business and treating them as deductible expenses.
• Another area that is worth mentioning is when a business owner (or owners) have multiple businesses that work together without proper documentation of the relationship(s) between the businesses.  For example, a business owner may own a number of investment properties in several different LLCs and then have another separate entity act as the management company for those properties.  While there is nothing wrong with this, and in fact is actually a good idea, it is important to have some clearly defined agreements in place between the entities so that funds that are passing back and forth between them can be clearly linked to the service or management agreements that are in place to support these activities.
• Finally, if you are a business owner who decides to buy a building so that you can run your business out of that building and be your own landlord, do not make the all to common mistake of ignoring the need for a Lease Agreement.  I understand that you may be the sole owner of Company A, the operating business, as well as Company B, the property owning business, but they are still distinct and separate entities so it is very important that they conduct themselves in that manner and sign a valid Lease Agreement, just as any other tennant would be required to sign.

There are other important matters that should be covered and I will circle back to these in the next couple of months, but I think this is sufficient information to get you thinking for now.  I hope that each of you will examine your own business practices closely and make adjustments where needed...

Spring Cleaning

I recently posted a blog article surrounding Piercing the Corporate Veil, a topic that I reference frequently and definitely want to dig deeper into in the near future. However, today is April 1st and while we have been enjoying beautiful Spring-like weather for weeks, the calendar verifies that Spring is now officially here. With that in mind, it seems appropriate to address the topic of Spring Cleaning within your business!

If you are a typical business owner, time is in short supply and the finer details are often over-looked as you scramble to keep up with all of the other important responsibilities that are on your plate. While this is a common predicament, it can also set you up for extreme disaster. Let me encourage you to set aside some time to address the following key areas:

• Review financial statements to verify that you have been operating within your budget for the 1st quarter of 2012, and expenses are trailing income (versus the other way around). If you find that you have been living outside of your budget, analyze the trends to determine why and devise a plan to turn it around in the 2nd quarter.
• I will assume that you have taken care of all tax matters and that your returns have been filed on time, but don't forget about other necessary filings that need to be handled. These might include Secretary of State filings for annual renewals or assumed names, filings with the Attorney General's office, or filings for licenses or certifications that you may be required to carry within your designated industry.
• Conduct a review of your business and make sure that you document the review in great detail and that the review documents are recorded and added to your Corporate/LLC Record Book. It is a common mistake to ignore these Corporate or LLC Formalities and yet it can create big problems for you, and your business, over the course of time.
• Assess your HR situation and take a hard look at shoring up your HR practices so that you meet the growing HR Compliance requirements. Have your employees been reviewed in a timely manner? Do you have completed employment applications and I9 forms on file for all employees? Has your Employee Handbook been reviewed, updated, and posted? These are all very important questions that should be addressed.

I realize that Spring Cleaning isn't the most exciting task on your priority list, but it is paramount in order to preserve the long-term health and viability of your business. While this may not be an exhaustive list, it is an excellent place to start and I would encourage you to take action quickly...

Piercing The Corporate Veil - Revisited

March has just arrived and brought our first real dose of "winter" with it. I don't know about you, but January and February have flown by for me and 2012 has been off to a very busy start. I have been working with many new clients, many of which are starting new businesses and pursuing a new idea (or life long dream). With all of the new excitement I am seeing, I felt that now is a good time to revisit the concept of Piercing the Corporate Veil...

• Because this concept may be new to some of you, a quick explanation may be in order. Quite simply, the act of Piercing the Corporate Veil means that the liability shield that a business owner's Corporation or LLC provides to them is rendered useless and their personal assets are ultimately exposed in some type of litigation against the business. While this may sound ridiculous to you, and in most cases the typical business owner is completely unaware that this can happen, I assure you that it is entirely possible.
• The most common scenario of Piercing the Corporate Veil is that the business owner failed to establish the entity with a firm foundation (perhaps because they took the "do it yourself" approach), did not properly review and document business activities on a regular basis, or allowed other "harmless" actions to blur the lines between personal and corporate separateness.
• In the past few weeks, I have had conversations with multiple attorneys who have had first hand experience with this type of activity and it rarely ends well for anyone. While we all agree that forming the entity with a firm foundation is crucial, it is equally important to maintain it properly on a regular basis through reviews and documenation. I will dig deeper into this in an upcoming blog post.
• I will leave you with this... If you have never taken the time to fully understand the foundation of your business, or what is required to properly maintain it, please contact Safe Shield. We provide a free review of your Corporate documents as well as a plan of action to repair any holes and keep your Corporate Veil secure going forward. More on this in the coming weeks, but feel free to contact Safe Shield today...

Finish 2011 Strong And Start 2012 Stronger

Thanksgiving has come and gone and December is upon us, bringing with it all of the joy and excitement of the Holiday Season. With the Holiday Rush in full swing, many business owners are working feverishly to wrap up year-end business prior to unwrapping whatever Santa might leave under the tree.

It is also a time for many of us to reflect on all of our blessings and look forward to time spent with family and friends. I am truly thankful that I have been blessed with a wonderful family, a rapidly growing business, and a host of wonderful clients and contacts. 2011 has been a year of great growth, both personally and professionally, and I look foward to 2012 and the year ahead.

As we close out the year, let me encourage you to finish 2011 strong and start 2012 even stronger. You might be saying to yourself "gee that's great advice Kent, but how do I do that?". The answer actually isn't all that complicated if you remember 3 important rules:

1. Create a Task List of items that need to be completed by year-end, and prioritize them based on level of importance. As you review the list, those items that should take priority will usually rise to the top in obvious fashion. It is not uncommon for us to avoid the things that we least like to address, but I would suggest doing those things first.
2. Plan for 2012 and document your Goals and Forecasts. Many business owners assume that this requires hours and hours of thought, reflection, research, etc, but I disagree. Yes it takes some time and effort, but it does not require multiple weekends spent in seclusion in the effort to create a 50 page professional document. You know what typically happens with those? More often than not, they are rarely looked at again. I suggest that you review your P & L statement looking for areas where you can eliminate cost and create margin. Then determine how much you want to increase sales, which new accounts you will target, and which relationships you may need to cultivate to make it all happen. I would suggest condensing this information into a 1-2 page document that can be reviewed easily, and often.
3. Address your Corporate Formalities and document things well. When you look at your Task List and identify the top priorities, it is easy to drop this to the bottom or leave it off of the list completely. This is a huge mistake and could prove costly, if not fatal, to your business. Observing Corporate Formalities and properly documenting your business activities is paramount to preserving the integrity of your Corporate Veil and keeping yourself protected personally. If you aren't sure what Corporate Formalities are, please refer to some of my previous blog posts or contact the Safe Shield office.

That's it, that's all there is to it. Sounds pretty straight-forward doesn't it? I would like to close out this post by wishing all of you the very best during this Holiday Season and much success in 2012.

I Don't Know What I Don't Know...

Many years ago I manged a sales guy who regularly made the statement "I don't know what I don't know". He was a good natured guy with a reptuation for being a bit scattered, at times, so my typical response to him was "you don't even know what you know, much less what you don't know". As I said, he was a good natured guy and always took it in stride with a smile.

Fast forward to present day and I have become much more aware of the fact that "I don't know what I don't know", and my kids are a daily reminder of this. As their knowledge grows, they are able to educate me on all kinds of things that I was previously oblivious to. While much of what they share with me isn't exactly world-changing information, it serves a purpose none-the-less. It is a simple reminder to me that I don't "know-it-all".

Have you ever met someone who is widely perceived as a "know-it-all"? I am relatively certain that all of us have come across someone like this at some point and if you are anything like me, you may not hold a "know-it-all" in the highest regard. Let's face it, there is just no way that any one person can know everything and it should be easy for any rational individual to concede that.

The same principle is true in business... no one person can know everything. Of course we all have our areas of expertise and as a business owner, it is that expertise that our business is built on. However, there are many components to running a business and we cannot possibly know everything that there is to know about each one. If we are to be successful in running our business, it is imperative that we rely on our trusted advisors to help us in the areas that fall outside of our respective areas of expertise.

Whether our specific needs are related to technology, accounting and finance, or insurance and risk management... it is paramount to our success that we lean on the wisdom of others to guide us in the areas that we are weak. When we focus 100% of our efforts on the things that we do well and allow others to fill in the gaps within the areas that we don't, our efficiency and profitability will rapidly increase.

I encourage you to willingly state that "I don't know what I don't know", and turn it into a positive by seeking out trusted advisors to help you...

Are You Ignoring Corporate Formalities?

I ask this question knowing with a fair amount of certainty that most business owners would either answer with a definitive "Yes", or would simply respond with a blank stare confirming that they don't fully understand what Corporate Formalities are (much less why they are so important).

• I felt compelled to focus my latest blog post on this subject matter after a recent discussion with one of my trusted attorney contacts. The attorney was sharing with me yet another story of a business owner in crisis due to the piercing of his Corporate Veil . What made this story truly sad is that if the business owner had simply observed Corporate Formalities, the catastrophe that followed would most likely have been avoided. My attorney friend and I were in agreement that it is imperative that business owners understand what Corporate Formalities are and why they are so important.
• I have replayed that conversation muttiple times over the past few days which confirmed that I simply cannot focus enough on the education process surrounding these Corporate Formalities. I think most people understand that one of the most important reason to formalize your business entity is to create a protective layer between the business and personal assets of the shareholder, so it is perplexing to me that the idea of maintaining the integrity of that Corporate Shield is rarely given a second thought.
• The bottom line is this: observing Corporate Formalities is paramount in preserving the Corporate Veil and maintaining the layer of separation between your business and personal activities and assets. If you are unaware, or simply unwilling to take these steps, then the formation of your entity was a complete wast of your time and money.

If you are a typical business owner, I'm sure that you already have a full plate with overseeing the day to day operations of your business. However, I would encourage you to give some thought to Corporate Formalities and the role that they play in fully protecting your business. If you have been ignoring them, consider changing your practices. If you don't fully understand them in the first place, consider contacting me to learn more...