For several days in December most years, I clean out the cabinets in my house. I discard items I haven’t used in the past year and make a list of those things I need to fix or replenish. Unless I block out this time, it won’t get done.

While preparing this article, I thought about doing such an assessment for our businesses. As 2022 moves forward, you might want to reflect on the following legal issues.

1. Agreement Among Shareholders of Your Company

If your business has more than one shareholder or member, if for example it’s an LLC, you’ll want to put into place a Shareholders/Members Agreement. For convenience purposes, I’ll use “shareholder” to mean either.

Why Is That Important?

Assume you or another shareholder:

• Wants to retire.
• Dies.
• Divorces.
• Is disabled and can’t continue working.

Will the remaining shareholders be required to purchase the departing shareholder’s shares? At what price? Over what period of time will payment be made? What if you want to purchase those shares but another shareholder does not? Assume a married shareholder dies and the shares are transferred to the spouse. Do you want to be business partners with that spouse? What if a shareholder divorces?

Withut an Agreement, Those Questions Are Left Unresolved

Even worse, without an agreement, any shareholder is free to transfer his or her shares to any third party. Additionally, there is no requirement that other shareholders purchase the departing shareholder’s shares.

If answers to these questions have not been addressed up front, the result will be negotiations among the shareholders. Of course, at that time the departing shareholder will have lost his or her leverage. And we all know what happens when you lose leverage.

Your Business Is Part of Your Estate

You’ve spent many years growing your business. You consider it a major portion of your estate. Perhaps you’ve had a lawyer prepare a will and/or trust for you to protect your estate and your family’s future.

If you haven’t addressed the value of your business and the mechanism by which the other shareholders will buy you out upon your departure (voluntary or involuntary), you’ve neglected the dispensation of an important asset of your estate.

2. Closely Related to Number 1: Succession Planning

Perhaps you’re the sole owner of your business.

In my many years as a lawyer for small and mid-sized businesses, I have observed that succession planning is the single-most neglected aspect of business ownership. Maybe it’s human nature to think that we’ll always have time to deal with it later. The truth is, if you don’t get around to it and the unexpected occurs, the impact on your family and employees could be devastating.

The best way to approach the process, in my experience, is by dedicating a year to the effort. That’s how long I find it takes. Spend three or four months discussing the process with your family, key employees, your bank and other key stakeholders. Get your lawyer and your accountant involved from the outset. Develop and refine the plan over the next few months. When it’s done, you’ll thank yourself, and your business will be better off for having gone through the process.

3. Employee Termination

It happens to many businesses. You hire someone you believe to be more qualified than they really are and soon realize you’re losing money by keeping them around. Or you find out that they just don’t fit in with the rest of your employees and are affecting productivity. You’ve come to the conclusion you need to terminate that person.

You can lessen your chances of legal repercussions if you take the right precautions before terminating anyone. This starts with documenting any disciplinary actions involving the employee. Ideally, you’ll also have an employee handbook in place that clearly documents your company’s rules, regulations, and disciplinary actions should they need to be taken.

Whether or not you have an employee handbook, you should have something in writing between you and your employee (such as an offer letter or employment contract) which describes:

• Roles and Duties.
• Salary.
• Benefits.
• “At will” employment relationship between your company and the employee. (This is a key statement which confirms that either the company or the employee has the right to terminate employment at any time.)

4. Working Without a Contract With Your Principals, Employees or Sub-Reps

To follow are some of the issues you’ll encounter working without a written contract.

Contracts With Your Principals

Protect your right to commissions. I’m struck by the frequency with which sales agencies don’t have contracts with their principals. Or, if they do, the contract is silent on issues the agency knows can become major problems, particularly related to the agency’s right to commissions.

You’ve probably experienced situations in which your principal unilaterally: (i) changed the commission rate on a transaction; (ii) deleted an account from your territory; (iii) changed your territory; (iv) terminated the contract on the eve of a large customer order; and/or (v) withheld commissions post termination on orders you brought in.

If you’ve been engaged in any of these disputes with your principals, what has been the result?

Let experience be your guide. If a principal’s contract gives them discretion to make any of these changes or if post-termination commissions are unreasonably short and/or don’t account for your sales cycle, make sure you discuss these issues before signing the contract.

Addressing these issues in the contract is no guarantee that disputes will be avoided. However, they provide ground rules and legal protection if there is a violation.

Contracts With Your Employees and Sub-Reps

Contracts with your employees. While many businesses have oral employment agreements with their employees, it’s advisable to present to the prospective employee for their signature, an “Offer Letter” spelling out the details of employment (salary, benefits, job responsibilities, non-disclosure clauses). The letter should include “at will” language, meaning that both the employer and the employee can terminate employment at any time.

Commissioned sales employees. You should have a clear and enforceable written commission plan for your commissioned sales employees. Know the law in your state. For example:

• California requires written agreements for employees paid on a commission basis.
• Maryland invalidates clauses in a commission sales agreement requiring the salesperson to remain in the company’s employ in order to earn commissions.
• Other states, including Illinois, Michigan, Minnesota and Pennsylvania, recognize the “procuring cause doctrine” if an agreement is silent as to post-termination commissions. This means that if a sales employee “procured” the sale, he or she is entitled to commissions on that sale even if it was finalized after employment ended.

Non-solicitation clauses. You might want also want to include a clause requiring that the employee refrain from soliciting your principals’ business if the employee hangs up a shingle as an independent sales representative. Know your state’s law regarding non-solicitation. This clause, as well as the non-compete clause, must be carefully written in order to be enforceable.

• In California, non-solicit and non-compete clauses are unenforceable.
• In Illinois, beginning January 2022, employers cannot impose either non-solicit agreements on employees earning less than $45k annually (with periodic increases) or non-compete clauses on employees earning less than $75k per year (with periodic increases).
• In most other states, the non-solicit clause must be reasonable in geography and scope, limited in time, and protect the agency’s legitimate interests.

Contracts with your sub-reps. It’s also advisable to have written agreements with your independent contractor sub-representatives. Consider the issues noted previously relating to commission plans and non-solicitation clauses.

5. Insurance

Many businesses initially purchase various types of business insurance coverage but, over the years, neglect to periodicalwly review the type and amount of coverage. As you plan for 2022, think about how your business has changed in the past year(s). It may be time to update your business insurance coverage if:

• Your revenue has significantly increased since you initially obtained your Property and Liability Insurance policy.
• You’ve added employees (Workers’ Compensation).
• You’ve added sales employees (Commercial Auto).
• You’ve accelerated your move to online business (Cyber Liability/Data Breach Insurance). This insurance covers financial losses your company incurs as a result of data breaches and ransomware attacks. If you maintain any personal information on your computer, you are responsible for damages associated with its breach/leak. In its early years, data breach insurance coverage was expensive. These days, coverage is reasonably priced.

More generally, now is a good time to take stock of changes to your business and ask your broker if your coverage is still right for you.

Don’t forget: Don’t be reluctant to ask your principals to add your company as an additional insured on their product liability insurance policy. It costs no money to the principal (part of their business insurance coverage includes adding organizations as additional insureds).

Conclusion

Many of us tend to make personal resolutions at the beginning of a new year. Even though 2022 is several months along, my recommendations are that you make resolutions for your business and resolve to (i) create a shareholder agreement with your partners, (ii) develop a succession plan, (iii) ensure that the contracts with your principals protect your rights to commissions, (iv) prepare documents with your employees and sub-reps that include enforceable commission plans, and address non-solicitation issues, and (v) discuss changes to your business and corresponding insurance needs with your insurance broker.

MANA welcomes your comments on this article. Write to us at [email protected].