By Michael S. Melfi
Small businesses make up a majority of our economy accounting and here are a few statistics from the Small Business Administration (SBA) to demonstrate the impact:
-
The 28 million small businesses in America account for 54 percent of all U.S. sales.
-
Small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s.
-
The 600,000 plus franchised small businesses in the U.S. account for 40 percent of all retail sales and provide jobs for some 8 million people.
While there are many aspects, including mindset, to growing a successful company, there are some fundamental legal matters necessary for a company’s success. In this article we review five legal areas to consider in building a strong foundation for your small business:
Entity Structure
Having the proper entity structure is vital to establishing a successful business. Understanding the differences between a corporation and a limited liability company (and the implications on fundraising and taxes) is one of the first things that must be handled for your legal matters. While many online solutions for establishing an entity exist, it is very important to truly understand the nuances of this area to properly establish the corporate structure most advantageous to your situation.
Additionally, knowing that a majority of businesses will fail or go thru some kind of partnership dispute during its lifetime, it is crucial that the founders take the time to have the necessary corporate documents drafted to protect the interest of the parties and avoid ambiguity down the road. Addressing capital, transferability of ownership, roles and duties of owners and future funding structure are all integral parts of drafting a document built for the success of a business.
It’s All About Having the Right Team
Success of a small business is based on the people that compose the team. In addition to building the right culture, it is important to document the relationships with team members. Most small businesses have various types of relationships, ranging from independent contractors to equity-owning team members. The relationship with each of these individuals is distinctly different and requires the proper agreements to protect the interest of the business, as well as empower the efforts of each team member. Documents should memorialize each relationship and should be updated as changes happen to the business and the relationships.
Intellectual Property
It is estimated that there will be over 700,000 trademarks filed alone this year, and according to the United States Patent and Trademark Office website, over 30 percent of them will not be registered. These staggering statistics are similar for copyright and patents. And similar to entity formation, many founders will take matters into their own hands and attempt to file for intellectual property (IP) protection on their own without truly understanding the nuances of registering IP.
Understanding your company’s IP and treating these items as assets is an important legal strategy for a small business. The ability to secure and protect the business’ IP creates a strategic advantage and can have direct impact on the valuation of the business.
Financing and Funding
Almost every small business (at some point) will need financing or funding, whether angel investing, venture capital, crowdfunding, traditional bank financing or some other type of debt financing. Understanding the intricacies of financing instruments, securities laws and the various state and federal rules and regulations is fundamental to negotiating and securing a good deal. Properly drafting these documents is important to not only protect the business, but to insulate the investor and to remove any liability against the founders.
Succession Plan
While many businesses die on the vine, many others will eventually be sold or acquired. For these small businesses, having the proper plan in place for the owners and team members is essential. Proper estate planning allows successful businesses to take into account tax implications and protects their wealth.
Regardless of what industry a small business is involved in, it will inevitably come across legal matters. Understanding these key areas and what needs to be done is crucial to the success of the business and the growth of our economy. Take the time to find a strategic partner within the legal community to assist you with your legal needs.
Michael S. Melfi is an attorney with Bodman PLC in Ann Arbor, helping emerging and established businesses overcome the legal and financial obstacles that often stand in the way of growth. He’s the author of a series of four books, has published numerous articles and is the founder of an online curriculum called Be Investable. Michael can be reached at mmelfi@bodmanlaw.com or 734.930.2497.