Small Corporation Booby Traps

What can happen to your business if you bring in investors? Here’s one person’s tale.

This scenario happens all too often, yet isn’t discussed outside of the lawyers’ offices nearly enough. Are you a member and employee of a corporation and own less stock in the company than some others?

What is a common occurrence for young, hungry businessmen with a financial opportunity is that the excitement of being part-owner of a business is rather like getting married. It’s love. Sign the dotted line here, sign it there. “Whatever, just give me the papers, and I’ll sign them”.

As a former business owner and employee of a corporation, I write this as unemployment becomes hard reality. Did you know that if you own less shares in a corporation than someone else and are an employee, you could be fired?

Legally, and this must be agreed upon by all shareholders with more stock than you, you could be fired without pay with no recourse but demanding to be paid in full for your investment.

But what if the corporation dropped in value? What if the corporation was in such dire straits they could not afford to pay you all the money you have coming immediately?

The easy answer is to take them to court. But did you read the documents over carefully when you signed on to be a member of the corporation? For some (and you can include me), when 20 years pass, and you think you have the bull by the horns with seniority, did you remember what you even signed that long ago?

In my case, there was a paragraph on the contract that allowed the corporation to buy me out over the course of seven years. The buyout amount per month is less than what I made when I was an employee. And in seven years, my ownership and the establishment I worked at will be but a memory.

You have a right to refuse to be bought out, but this is where you’re taking a gamble. While you have a right to view financial records of the business you hold stock in, if your firing was a bitter and messy ending to a relationship, you may not be welcome to personally visit the establishment. You need a lawyer, big time.

If the buyout amount is an amount you feel is ridiculously low, you’ll have to hire independent auditors to do a complete inventory of the business, which is your legal right. But you better hope you have about $5,000 laying around to pay them for that service. Most suddenly unemployed people couldn’t afford the gamble.

So just what do you do? Well, you must face cold, hard reality that you were naive and jumped into a business decision that wasn’t well thought out. And you cannot right your wrongs when it comes to signing your John Hancock on legal documents.

Think with your head and not your heart if you are lucky enough to get involved in a corporation without a previous bad experience. Read the documents carefully. Pay a lawyer now to read them all before you sign them. It will cost you, but not nearly the price you’d pay if you didn’t think things through and ended up unemployed years down the line.

Approach any business opportunity with equal parts enthusiasm and skepticism. Do your homework before the ink on the papers dry. It will not only save you potentially a lot of money, but your sanity as well.

J. Robert Weber is a freelance writer and web designer who owned a musical instrument retail business for 20 years and ended up getting fired from his own business after missing 6 months of work due to health problems. He can be reached via email at jaspur@new.rr.com.