The Point: Business entity transformation can mean big results for business owners, regardless of entity size. Transforming a small company into a larger company with bigger revenue and market share can be a daunting challenge. It can also be time-consuming, costly, and ineffective if the owners don’t know what they’re doing. So in this post, we’ll explore a simple — yet insightful — framework for helping business owners understand their obligations to inform themselves as they prepare for, and successfully execute, a business entity transformation… Enjoy!
It’s All About Entity Transformation… But Where Do You Focus First?
Business owners — For our purposes, those that lead and own the business entity initiatives, regardless of if they are actually equity owners — are required to inform themselves about any and all changes in their business structure, product mix, or market shares through whatever means necessary. For example, a business may have recently incurred new technological breakthroughs and may now face new regulatory requirements. They may face changing market demands as customers demand more products and services with less money. Or they may have recently entered into an acquisition deal and now need to comply with new reporting and disclosure regulations. Each of these examples requires careful and detailed communication with key stakeholders. Failure to communicate properly and fully can result in fines or penalties, and can also result in potential harm to the business entity itself by diminishing its ability to protect and grow the business.
Business Entity Transformation Is More Than Strategy and Communication
It is not only the business that must be notified and informed of changes in its structure, product mix, or market shares (i.e., Strategy). Organizations engaged in transforming their business must also notify employees, officers, and other key executives. Business transformers should always remember that the first person in the chain of command, after the CEO and board of directors, makes the final decisions. Employees will likely be hesitant to question the new policies regarding pay and working conditions. Executives may also hesitate to raise questions regarding their own bonuses and stock options. By providing early and accurate notification of changes to all employees, the business can avoid this sort of crisis.
Business Entity Transformation From New Technological Breakthroughs
The business must also be aware of the potential impact that any new technological breakthroughs or regulatory requirements may have on its ability to operate and compete effectively. A major change in one technology can eliminate or reduce the need for certain functions, and require the development of new or additional technologies. Similarly, a change may make it necessary to retool the business’s methods to take advantage of the new technologies. The methods by which a business operates can change over time as well, if it is pursuing a strategy focused on market segmentation. Both of these scenarios can result in significant disruptions to a business’s operations and may require adjustments to business processes and employee routines.
Business Entity Transformation Is Change
Businesses also face the challenge of integrating changes with current practices. If the business has been successful in the past in the formation and execution of its strategies, it may prove difficult to change the same strategies and execute the same processes. For example, if the business has successfully established a balanced mix of internal and external resources, it may prove difficult to change to a new sales and marketing strategy if it is based on the same internal resources and practices. Likewise, if an existing procurement strategy is effective, changing to a new procurement process could result in a loss of competitive advantage.
Another difficulty faced by a business that wishes to convert to a different legal entity is that of change management. There are many issues involved in change management, such as identifying who will manage change activities, evaluating the impact of any new regulation, and ensuring that the new regulation complies with the corporate governance standards already in place. Changing the makeup of a board of directors or personnel to include new members while maintaining key personnel may prove difficult, if not impossible, once regulatory requirements are implemented. Moreover, there may be an added administrative cost involved in tracking personnel changes and making any other personnel changes necessary to implement the new regulation. Finally, the implementation of new regulations can have a negative impact on cash flows and liquidity and the need to obtain additional capital in order to support the new regulation. This risk could be reduced by better aligning company objectives with business governance standards.
Business Entity Transformation – Where To Get Help?
Businesses should seek assistance when they are in danger of changing their legal structure. The legal documentation for incorporating a new corporation, limited liability company, partnership, or corporation varies from state to state. It is important to identify the requirements of the state in which one wishes to incorporate and make sure that the legal documents are current and comply with the requirements. A business that wishes to convert from a C-corp to a S-corp will have to register the corporation, obtain special certificates, and pay taxes on the transfer of shares and assets. Business owners may feel overwhelmed by the rapidly changing corporate governance requirements and the potential costs and risks associated with these changes. Hiring a consultant can help reduce the stress and complexity of navigating the complexities of incorporating a new business entity.
The most important thing that a business owner should remember is that a business entity is often very different from the “person” that owns and controls the business. A business is often a complex legal structure that consists of many different parties and relationships. Business governance is often referred to as “business code”, and this code is often very difficult to understand and follow. Consulting an attorney who specializes in business law can provide insight into the current requirements for incorporation and a review of the possible future changes that may affect a business’s structure and management. When incorporating a new business entity, it is important to hire an attorney who understands the complexities of incorporating and knows how to navigate the ever-changing business terrain.