The Importance of Documenting Your Biz Relationships

Document the Partnership

It is always worth discussing time and time again, the importance of business governance and why these documents are critical to survival of your business especially if there is more than one business owner involved.

Often problems come into play with the closely held or family owned business where documentation is lacking (because of over-dependence on prior relationships and trust). In these cases, the business suffers when the business owners can no longer agree on how to properly operate the business. Internal disputes or “business-divorce” cause the business to hemorrhage money internally as operations come to a halt and the business owners spend tens of thousands of dollars on legal fees, forensic accounting, and expert valuations.

More often than not these types of disputes can be avoided substantially when the business owners take the time and spend the money to properly document their business governance. Solidifying and identifying the expectations, goals, and responsibilities of the respective business owners will ensure continuation of the business as a going concern when the business owners come to a point of disagreement as to management.

One of the most important documents available to a closely held or family owned business is the buy-sell agreement. Usually funded by insurance or disability policies, the buy-sell agreement sets forth an objective mechanism for valuing the business which in turn significantly reduces the costs of any business-valuation related dispute. Business governance documents including an operating agreement (for the LLC), shareholder agreement and bylaws (for the corporation) and a partnership agreement (for a partnership).

Document Employment Relationships

Business governance also includes governing the employment relationships including the relationships between the Company and its consultants.  Employment relationships are typically documented in the following types of agreements: basic employment agreement, executive level employment agreements, indemnification agreements, independent manager agreements, and employee handbooks. Remember that from a tax perspective failing to properly treat an individual as an employee (and instead treating them as an independent contractor) can have dire consequences.

Document Your Client Relationships

Creating the right service contract for your business should start with the issues specific to your particular industry whether it be food distribution or manufacturing, construction, real estate development, fashion, auto repair, computer services or financial services. Not all industries are created equal. The challenges of one industry can differ greatly from another. The needs of one business may also vary from the needs of another business within the same general industry.

For example a construction company that focuses primarily on residential design-build will have different clients and contract management requirements than a construction company that focuses primarily on large commercial projects. Having an open discussion with your business attorney about your services, clients, and general concerns is a valuable starting point.

The service contract tailored for your business doesn’t have to be a long overly complicated instrument. However, it should address the contract basics such as price, scope, performance, acceptance and default.

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