As we dive into the first part of our nine-part series about the biggest business vulnerabilities, we start with corporate governance. This area of your business is full of pitfalls that are outside of your usual wheelhouse. On one hand, we have the ownership structure both present and future. Working though these issues frequently has a significant impact on issues ranging from tax and inheritance. Many businesses fail to plan for the future and do not put together a plan for generational change of ownership. This can be an absolute nightmare if the ownership of the business ends up in probate court.
Similarly, if a son comes into the business with his father or sometimes even worse, a son-in-law, the issues with corporate governance often become problematic. We experienced this in my own family when a family member went into business with their father. The dad just could not let go of the reins of the business. He could not bring himself to pass the title of president on to his son. Ultimately, the son had enough and moved on to a different career. The business had to be sold ending a family legacy that the father hoped to pass on to his kids and grandkids.
On the front of dealing with the governance there is simply the compliance with state filing requirements necessary to maintain your limited liability status. Due to the complexities of the questions regarding these filings and their interrelation to tax issues it is not uncommon for companies to lose their limited liability. This, of course, leaves the owners personally liable for the liabilities of the business both for accidents and contracts.
We recently had a situation where the state legislature placed a new tax on business due every year in the princely sum of $25.00. This minor nuisance turned into an absolute nightmare because hundreds if not thousands of businesses overlooked the payment of this tax. Even many accountants failed to catch the need to pay this. The lack of payment left these businesses potentially without limited liability because their companies were placed in suspension by the tax commission.
Similarly, the failure to register your business in a state where you are doing business can cause the loss of limited liability for claims or suits made in that state. Preventing this sort of problem is rather simple but fixing it can be a nightmare including not getting to defend suits brought against the company or being personally liable.
When my firm is litigating against an out of state company that is one of the first things we look for. If they have come to our state and failed to register, their ability to prosecute/defend the suit can be severely limited. That is a great advantage to us, and we use it to our clients’ utmost benefit. Registration is a simple fix and is usually inexpensive. Given that we do business in several states and growing it is a formality that my firm takes very seriously.