Spring Cleaning For Your Small or Family Business
by Jennifer Emens-Butler
Spring is often thought of as a time for renewalwhen we think of springwe think of cleaning out back closets. For small and family businesses, spring is a good time to clean out the clutter of your company.
Our family business corporate documents haven't seen the light of day in over 15 years. This is more common than most people think, but there are simple solutions. You need the protection of accurate corporate records so that your corporate entity will be recognized by third parties (such as the IRS and litigators) as a separate entity from the individual shareholders. In cases where the corporation does not have significant assets and when various corporate formalities are not consistently maintained, then a court may disregard the corporation and hold the individual shareholders and directors personally liable! Your family business needs to carry out your business and look and act the way a corporation should so that the courts will not disregard your corporate form.
The spring-cleaning of the minute book requires a review of the entire minute book so make sure the formation documents are accurate, and that annual shareholder and director minutes are recited. Ratification minutes can be executed for any actions that may have occurred since the last meetings, stating that the directors and shareholder approve such actions. The entire process is very quick, and relatively inexpensive and should not be ignored.
The more difficult closet to clean especially for family businesses is the problem of Compensation Confusion. Compensation Confusion occurs when a family member is not paid 'market value' for his or her workbut is paid either more or less. Often a newly hired family member may be paid the same as loyal 10 year employees. The effect on non-family members can be devastating. In addition, that family member may never leaveeven if he or she is not adding any value to the business. Conversely, if valuable family members are paid less than market value, they often will leave even if ?someday this will all be yours? is the carrot. Compensation Confusion can also occur when all children earn the same salary, thus taking away the incentive to work hard and do a good job.
Take stock of the various salaries paid in your family business and take a hard look in the back corners filled with relatives. Make sure your compensation is actually based on pay for performance. The IRS will often examine family owned businesses to analyze the compensation paid to any owner-employee to see if some portion of the family member's salary should actually be classified as a dividend.
This topic may be appropriate for a spring meeting of the family business council, which is also recommended. It is wise for all family businesses to create a family business council and have family members meet regularly to discuss these and other pressing issues.
Another area to clean out is the collection of old (and not up-to-date) policies hanging around. Spring is a great time to update personal employee information such as addresses, phones, cell phones and other contact information. Many areas of the law affecting small business are always in flux. Are the policies contained in your employment manuals up-to-date? Do they match the latest rules concerning the Family Leave Act? Did Sarbanes-Oxley affect your business even if you are not public? Does your insurance carrier want changes to your policies for use of automobiles? The Internet has also created its own issues are your confidentiality and internet user policies up to date? When employees log on to your computers, do they acknowledge that there is no expectation of privacy?
Spring is fleeting, but it is not too late to strengthen your business and bolster its image by removing a little clutter.
The information provided in this article is offered for informational purposes only; it is not offered as and does not constitute legal advice. Every situation is unique you are encouraged to seek legal consultation to address your individual circumstances.