Wednesday, February 24, 2010

Legal Assessments: Entity Structure Adding Value to Your Business

After several weeks working on trial preparation and other cases, I can get back to writing a bit more substantively for the blog—particularly on the topic of legal assessments. 

As a refresher, my Legal Assessment posts are about exploring some of the legal issues affecting business from a relational perspective.  Often, business people see legal rules and structures as essentially roadblocks to getting things done.  Sometimes this is true, often times it is not.  Doing a Legal Assessment is about examining the rules and laws to understanding the reasons for them in order that we can properly evaluate our position in  relation to all of the people and business around us, and engage in business responsibly.

The prior posts were as follows: First, I highlighted what it means to look at legal issues from a relational perspective.  Second, I discussed the basic types of business entities and the concepts behind having a separate business entity.  Third, I discussed how some legal principles and structures can promote the independent operation of a business entity.  Screwdriver

Now, for the fourth installment, I am going to highlight some of the specific legal tools and principles that can be used by a business to add value to its operations.

Duties and Responsibilities

Knowing what one is required to do, what one may do, and what one can expect from others, is foundational to beneficial interactions in the business world.  There are rights, privileges, options, discretionary rights, conditional rights, and much more.  These concepts in law are every well developed.  Business can take advantage of these concepts to better define their business activities in their formational documents, inter-business contracts, employment relationships, and other interactions.  Doing so allows businesses to better control their costs, income, expenses, and risks. 

Using these legal principles can be as simple as defining when and how a business is going to be paid for a product or service to make sure that its cash flows are predictable.  For example, setting up a construction subcontract so payment terms are based on percentages of delivery of materials or completion of work may make the difference for a business to be able to stay afloat during tough economic times.  Another example might be locking in a discount from a supplier contingent on prompt payment during an initial term.

The other side of this equation is to take advantage of the latitude allowed by law to limit responsibilities and duties so that costs and expectations are appropriately limited.

It is not only important to have the business deal concepts in place with another party, it is also important to create and use appropriate language that gets the job done.

Notice and Disclosure

A familiar topic in business failures and problems is when one person is alleged to have unfairly taken advantage of another.  An extremely easy and cost effective process that would often avoid these types of problems, and sometimes even facilitate more advantageous results for the parties involved, is notice and disclosure.  For example, sending a letter to an affiliate to let them know you are considering changing suppliers before you actually do so, or telling a partner about a purchase decision.

Clearly, sometimes information is confidential and cannot be shared.  But many times, notice and disclosure are simply overlooked.  A deal may be going well and one simply does not consider whether others might want to know about the deal, be concerned about it, or have an interest.  We also may assume that others with whom we are communicating understand all the information we take for granted.

But notice and disclosure can be extremely valuable.  Often, simply giving others a chance to take a look, or letting others know about a transaction, or decision, eliminates the ability of others to object later.  Providing notice often creates a presumption of fairness.  Providing notice can shift the burden or obligation of raising an objection or concern.  Providing notice can result in obtaining additional information from other sources that one might have overlooked, or even been unable of obtaining, resulting in major corrections.  And providing notice, even when it is not really necessary, can build integrity and trust.

Notice and disclosure is about knowledge and freedom.  We have to remind ourselves that we do not know everything, and that when we let others know information, we actually obtain more freedom to act without fear or reservation.

Compliance

The last legal principle is simply doing what you say you are going to do.  Whether it is internal or external rules or regulations, it is extremely problematic for a business to set up a requirement and then ignore it.  Often times, this happens simply because business’s loose track of their own rules or get busy and forget to do what is necessary to comply. 

But rather than ignoring the failure to comply or the rules they just can’t get to, businesses should adjust their rules so they accurately reflect their values, and their compliance is consistent.  This not only helps businesses avoid problems with those who might complain when the business fails to comply with the rules, it also helps both internally and externally interested parties understand the business values and act accordingly minimizing costs for the company.

In other words, if your members do not actually have their annual meeting on the first Wednesday of each September, the formational documents should be adjusted.  And if you have an employee manual that calls for annual reviews, which do not actually take place, something needs to change.

Conclusion

The implementation of the legal principles of duties, notice, and compliance, add value to almost all the aspects of a businesses operation.