Why It’s Important (And How) To Document Business Relationships

It is always worth discussing the importance of business governance and why certain documents are critical to the survival of your business.


Jeffrey Davis Esq. | Source: Courtesy Photo

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

Problems often come into play with a closely held or family-owned business where documentation is lacking due to an over-dependence on prior relationships and trust. In cases like these, a business suffers when owners disagree on how to manage the business.

 

Essential legal documents every business needs

Here’s a look at three key areas that business owners should pay close attention to when drafting business governance documents.

 

Document general business governance

Internal disputes or a “business divorce” can cause a business to hemorrhage money internally as operations come to a halt and owners spend thousands of dollars on legal fees, forensic accounting, and expert valuations–not to mention other daily disruptions that can impact the business.

More often than not these types of disputes can be avoided when owners take the time and spend the money to properly document their business governance. Identifying and solidifying the expectations, goals, and responsibilities of respective business owners will ensure the continuation of operations when owners arrive at a point of contention regarding one or more management matters.

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 owners should also draft business governance documents including an operating agreement (for an LLC), shareholder agreement and bylaws (for the corporation) and a partnership agreement (for a partnership).

 

Document employment relationships

Business governance also includes governing 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 instead of treating them as an independent contractor, can present dire consequences.

 

Document 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 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.

 

Jeffrey Davis Esq. is a licensed and experienced New York business attorney serving the Westchester and surrounding counties. His law practice focuses on the needs of business owners in all aspects of business law including litigation, contracts, and startups.

 

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