Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. He can be reached at firstname.lastname@example.org. This column does not constitute legal advice; contact an attorney with questions.
Don’t risk losing your profits. Make sure you follow these four simple “legal essentials” designed to make your security company more profitable:
1. Select the Correct Entity
Corporations are almost a thing of the past. Today, most new companies are limited liability companies — commonly referred to as an LLC. LLCs provide the protections afforded to corporations while serving as a “tax pass through entity,” which means the state and federal income tax liability passes through to the owners (called “members”) and their personal tax returns. For 99 percent of owners, this is the most tax-efficient structure for a security provider, especially given the industry’s approach to acquisitions — buying assets, not equity.
Traditional or “C” corporations are a problem on exit because the owners will end up paying nearly half of their total purchase price on taxes. If your company is a C corporation, consult a professional to see if you can convert to “S” (subchapter S of the IRS Tax Code) status. It may cost a little today, but save you a great deal when you exit. For more on this, read my Feb. 2014 column at www.securityinfowatch.com/11299261.
2. Adopt Buy-Sell Agreements
Make sure your company has a written agreement governing the sale of each owner’s equity interests (called “membership interests” in an LLC). Every company should have one even if the company has only one owner. If you have more than one owner (multiple members), a buy-sell is more important and should be part of an overall operating agreement.
The operating agreement governs important issues, such as: who is in charge of the company’s day-to-day operations; whether there is a board of managers (like a corporate board of directors); and when the company distributes cash to members and in what amounts. Another important consideration is what happens if a member wants to leave the company: Must they tender their membership interest? If so, to whom and for what price, paid how? Can a departing member compete with the company once they depart? Are they legally free to solicit and accept business from an existing company customer? Can one group of members force other members to participate in a sale of the company’s assets or equity interests (Often called a “tag along” provision)? Can members require other members to sell their membership interest to a third-party (Often called a “drag along” provision? How is the value of a departing member’s membership interest set for purposes of a buy-out?
A good operating agreement covers these and plenty of other issues. These agreements are signed by members (and the company) and then put in the drawer and never looked at again. But if there are issues, it can be incredibly helpful to resolve potential disputes efficiently based on the parties’ agreement rather than having an expensive impasse or legal apocalypse because members failed to adopt cogent rules of the road.
3. Use Well-Crafted Employment-Related Agreements
Make sure your employees are subject to reasonable, enforceable restrictive covenants, including, where appropriate: non-compete, non-solicitation, non-disclosure, and non-interference provisions. Each provision provides a different type of protection, and each must be drafted to comply with applicable state law, which may differ from state to state, sometimes significantly. For more on restrictive covenants, read my Nov. 2013 column at www.securityinfowatch.com/11193200.
4. Use Enforceable, Effective Subscriber Agreements
There aren’t many absolutes in life and fewer absolutes in the law; however, the absolute best way to defend a security provider in a liability lawsuit is by enforcing the risk allocation provision in a well-written subscriber agreement — not at a trial in front of a jury comprised of actual or potential alarm subscribers untrained in the legal or practical realities of risk allocation, transference or mitigation.
Make sure your contract has all the risk allocation bells and whistles, including limitation of liability, indemnity and waiver of subrogation, among others. Make sure your contract is enforceable — that it complies with all applicable state and federal laws, especially if you sell to residential subscribers. Check to see if your contract address the services you sell (video, mobile apps, the Cloud, etc.)
Is your form is in plain English or stilted lawyer gobbledygook? I offer a plain English contract that civilians can read as well as trained lawyers. And make sure you can assign the agreement to a potential buyer so that you can profit from your years of hard work.
Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. Reach him at email@example.com. This column does not constitute legal advice; contact an attorney with questions.