New Year's Resolutions For Privately-Held Businesses

Running a business is not easy, particularly in the current economy. Here are some important resolutions that those running businesses should consider in the new year.

Entity Formalities. Hold corporate shareholder and board meetings or limited liability company member meetings (or execute appropriate written consents). These meetings can help focus owners and managers on business goals. In some cases they can also help avoid having creditors pierce the corporate veil and pursue shareholders for corporate obligations. Related entities (such as brother-sister subsidiaries) should implement appropriate agreements allocating joint costs, and should charge market value for inter-company goods and service transfers. If the owners do not respect the separate nature of the entities, creditors might not have to either.

Business Name and Registration. Register to do business in any other state in which the entity does business. If the entity uses a fictitious business name, register the name appropriately. Also, don’t forget to file the annual Statement of Information with the California Secretary of State’s office.

Employee Handbook. Create, distribute and comply with an employee handbook, which will help management focus on employment laws and practices, while also creating reasonable expectations for employees.

Employee Procedures. Be sure that all employees have proper job descriptions. All employee procedures and important contact information should be in writing and shared with management. If possible, have a second person be familiar with this information and able to step in when an unplanned absence or departure occurs.

Equity-Based Compensation. As an alternative to issuing key employees stock or other equity compensation as incentives, consider issuing valued employees equity-based incentives based on company profitability and growth (such as “phantom stock”).

Posting Notices. Post all agency notices in the appropriate work places as required.

See the following websites for some important notice requirements: http://www.dfeh.ca.gov/publications/publications.aspx; http://www.dir.ca.gov/dlse/dlse-publications.htm; http://www.dol.gov/osbp/sbrefa/poster/matrix.htm

Safety Plans. Implement required safety plans, including an Injury and Illness Prevention Program. If an accident occurs, Cal OSHA will want a copy of the plan and reporting logs.

Regulatory Compliance. Ensure scrupulous compliance with rules of applicable regulatory agencies (such as the Federal Food & Drug Administration), and if they conduct surprise audits have similar mock inspections to identify compliance weaknesses.

Protect Proprietary Information. Protect all proprietary information and intellectual property. For example, register all trademarks and consider applying for patent protection with respect to any patentable information. Also, have those employees, independent contractors, vendors, partners and affiliates with access to your proprietary information and intellectual property execute confidentiality agreements.

Hiring Practices. Review hiring practices to ensure they comply with state and federal non-discrimination laws and that all employees are legally entitled to work.

Independent Contractors. Ensure that all individuals classified as independent contractors (who are not entitled to employee benefits and for whom income tax withholding is not required) are correctly classified under applicable guidelines.

Retirement Plans. Review retirement plans and practices to ensure ERISA and tax law compliance. Consider the recent Internal Revenue Code Section 409A requirements for non-qualified plans. Failure to comply can be costly.

Insurance and Benefit Plans. Have a knowledgeable insurance broker review all insurance coverage (such as casualty, property, products liability for companies selling products, workers' compensation, and employee benefits). Business owners should consider purchasing an “umbrella” policy. Evaluate premium costs. With work force or hour reductions, determine employee eligibility and comply with any COBRA continuation coverage requirements.

Succession Plan. Have a plan for transitioning management authority in connection with planned retirement or unplanned management departures. The value of a business can depreciate radically when an important management vacancy occurs without a plan.

Buy-Sell Agreement. Companies with multiple owners should have agreements restricting ownership interest transfers outside the appropriate group and dealing with death or disability.

Emergency Plan. Establish an emergency plan. See, for example,

http://bepreparedcalifornia.ca.gov/EPO/BePrepared/Businesses/Emergency+and+Evacuation +Planning+Guide+for+Employers.htm; http://www.osha.gov/SLTC/etools/evacuation/ docs/eap_checklist.pdf

Information Storage and Security. Ensure that important documents are properly stored, that computer files are regularly backed up, and that appropriate computer fire walls and virus protections are established to avoid hacking and computer viruses.

Internal Financial Control. Have a CPA review the company's internal financial control system and recommend ways to avoid embezzlement. Companies without such systems are often surprised when a long-trusted employee steals from the company.

Income Taxes. Hire a CPA or enrolled agent to prepare accurate tax returns. Report all income, even cash income, because (1) it's the law; (2) there are criminal sanctions and no statute of limitations for tax evasion; and (3) in some cases the tax authorities can show up unannounced, lock down the premises, and take computers and records that will reveal such abuses.

Tax Withholding. Properly withhold on all employee payments, and make all required employer contributions. When employees earn the wages, both the employee's and employer's portion of withholding taxes become a trust fund owned by the taxing authorities. Anyone responsible for withholding and paying over these funds will become personally liable for under-withheld amounts.

Lending Relationships.  Take your banker to lunch. Maintain lending relationships and know your borrowing capacity.

Real Estate. Review all leases and other real estate documents for deadlines, such as termination and option dates. Evaluate whether leased space is appropriate and not exceeding market rates. Even if your lease is not expiring soon, consider approaching your landlord now with a proposal to lock-in the current market rates (which are very favorable); landlords are very receptive to early lease extensions at this time, and may be willing to lower your current rent in return for your agreement to extend the term.

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Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.