The Many Hats Of A Small Business Owner
As a small business owner, it is likely that you will find it difficult to tell where you stop and your business starts. In many ways, you are your business, and your business is you. Other than your family and perhaps your faith, few other relationships can rival the way your business defines you.Most of the time this is a good thing. Small business owners MUST be passionate about their business. They MUST love doing what they do. Anything less would limit their ability to persevere when times get tough.
But having said all of that, I must also say that one of the biggest mistakes small business owners make is in the way they think about their business. They look at it as something that they have created, and over which they have complete control; as a direct extension of themselves.
It's understandable, really. Many small businesses begin with funding from a tiny investment of personal savings, a trickle of cash from current income, and perhaps some personal debt. Then what seems like "before you know it," (which might actually be several years), you've got a real live, going concern on your hands, with contracts, fixed assets, employees, leases, etc., plus (hopefully) profits and taxes. Along the way, things can run together.
Even if the company is properly structured legally, and operating with full separation between personal and company finances, many decisions made for the business directly affect the personal life of the decision maker. As events ebb and flow, finding the seam between a small business and its owner can be harder than finding the line between the Atlantic Ocean and the Gulf of Mexico.
A New Look
Sarah Calvert is one the most valuable members of our Brain Trust. As one of our resident small business attorneys, she has joined me on the show many times. In one visit we discussed the importance of taking a new look at your business as the legal entity it really is, and not as "your baby".
Sarah says that those business owners who can do this will be more likely to create the necessary documentation that helps them successfully operate their business, as well as keep the owner out of liability problems. She has reminded us that doing all of this will help you prepare for the legal steps that will be taken as you...
• grow your business,
• take on other shareholders,
• create a functioning board of directors,
• conduct personal financial planning,
• semi-retire,
- fully retire,
• sell the company,
• transfer the company to family or employees,
• become incapacitated,
• move on to that great marketplace in the sky.
In the event of any of these, you and your company will be better served if you have spent time defining the differences between you and the company, and the different roles you play in it.
You're Not Just An Owner
For this discussion I'm going to assume that you incorporated the day you began your business, and that you operate it yourself. The day you founded your business you became a number of different things all at once: shareholder, board member, officer, and employee. Let's look at how you wear these hats.
Shareholder
Based on my assumption, the very first thing you were to your business was shareholder. Another reason I have listed shareholder first is because as the owner of the majority of the voting stock, you actually have the most power of all other entities related to your company. Directly or indirectly, the operation of the business is subject to the wishes of the majority shareholders.
It's easy to see why many small business owners don't dwell on this title much, because you spend your career operating the business, which is not what shareholders do.
Another reason you don't think much about being a shareholder is because the steps to business formation and incorporation are not similar to buying stock in a public company. You invested your money alright, but those funds went directly to buy stuff and pay bills. The $1,000 check you wrote and designated as initial capital was a legal formality. And while you actually received stock certificates, there's a good chance that if you ever saw them, you haven't looked at them in a long time.
Get your certificates out and look at them. Think about yourself as an investor in the company which name appears on the certificate, not as investing in yourself. And as the majority shareholder, Sarah says you are responsible for making the next decision: The board members.
Board Member
Members of the Board make the big corporate decisions: Significant capital issues, such as major debt or equity transactions; acquisitions; expansions, etc.
I should also point out that as the corporation enters the marketplace to fulfill the board's wishes, board members can have legal exposure in the event company activity runs afoul of the law, regulation, or tort action. Take this assignment seriously.
Most small business owners only think about doing anything board member-like once a year, when they approve the updated corporate documents. The reason is because the big board-level decisions were likely made in the same setting, and at the same time that our board members were also performing the duties required by this board decision: Who runs the company on a day-to-day basis?
Officer
Congratulations. You are the President of the company. Do you know who hired you? You did, the first time you put on your board member hat. This assignment is a little more familiar, isn't it?! Sarah says this is the skin you will live in most of the time. You hire and fire employees, sell stuff, buy stuff, enter into contracts, sign leases, manage the finances, all the normal things a president does.
How often have you thought about the fact that you work at the pleasure of the board of directors? I want you to start thinking like this, because it will help in the future when your business grows to the point where you need to hire another person to be president. When your only paid position in the company is Chairman of the Board, you will have a very keen understanding of how the officers work for the board of directors.
Employee
I encourage small business dreamers not to start their business until they can think like an owner and not like an employee. Forget about days off, vacations, raises, and 40 hour work weeks. Those are things employees get. Owners may get them one day, but usually not in the early years. So it seems contradictory for me to tell you that it's now OK to think like an employee. But it is.
You hired yourself as an employee the second you became President. Even though your title is President, legally, you are an employee. With all the rights, obligations, compensation, benefits, and other trappings of an employee.
So...if you are an employee, could you be fired? Sarah says, absolutely. If you become less than a majority shareholder, it's possible that the shareholders could oust your board and install a new one, which could fire the old officers, one of whom is you.
But that doesn't mean you would have to be fired. You might just be demoted. You might demote yourself. I'm serious! I know an entrepreneur who was the technical brains behind the company he founded, but he didn't have the executive background to grow the business. So he hired a president, and became vice president. Don't worry, he still controlled things, because he was the majority shareholder.
Are you starting to see the relationship between you and your company a little differently. Read on - it's going to get easier.
Other Hats
There are a number of other roles you can play in your company that, while often less evident than the foregoing roles, actually help you create clear distinctions between you and your business. I am only listing three here.
Lessor
One of the best ways to acquire personal wealth is to own the real estate in which your business operates. Buy the property in your name, create an arms-length lease, collect rent, and become your company's landlord. Now you are actually doing business with your business.
If I had to choose one document to dramatize how your business is a separate entity from you, I would choose this real estate lease. Because if it's structured properly, the lease will include your ability to evict the tenant, your company, if it defaults on the lease terms.
Now, you're probably not going to evict your company as long as you are running it, even if it can't pay the rent for whatever reason. But the fact remains that you could. And that's a clear distinction between the you and your business.
Creditor
Remember that $1,000 of capital you invested on day-one? Well, you probably contributed more than that as you founded and grew the company. How did you account for that extra capital? Most likely you loaned it to the company. If you did, you should have created a promissory note with arms-length terms, and interest. In addition to being an investor in your company, you are now one of your company's creditors.
Debtor
Don't let this get out of hand, but you can become a debtor of your company by borrowing money from it. All of the same arms-length legal documents should be created as when you loaned money to the company. By the way, if you don't pay this back in a timely fashion, the IRS will help you understand your role as a shareholder by declaring the loan a dividend, and sending you a tax bill for the income.
Interchangeable Hats
You can be a shareholder, a board member, an officer, an employee, and all of the other things I've mentioned, all at the same time. Or you can be any two or greater combination of these. Your legally structured business is an entity separate from yourself, which allows you to own it, manage it, work for it, do business with it, and sell it.
Co-Mingling
There is one more thing I want to mention about the separation between you and your business: Money. Your business's money is not your money. Your personal money does not belong to your business. If money needs to be taken out of the company, it should be in the form of properly documented salary, bonus, reimbursement of expenses, dividends, rent, or loans. If money needs to be put into the business by you, it should be properly documented as a loan or as equity capital.
Don't co-mingle your money with your business's money. Co-mingling is a "can of worms" that can contribute to business failure in more ways that could be a whole separate article, if not a book.
Write this on a rock... Develop a clear understanding of how you are an entity separate from you business. Focus on all the different roles you play in your business. Acquire an intellectual attitude about all the different ways you interact legally with your business in the same way other arms-length entities do. If you can do all of this, you will create a healthy and mature relationship with your business that will go a long way toward helping you to be a successful business owner.
