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Question: A business owner I know recently was threatened with legal action by one of his minority stockholders for excessive compensation and for the personal use of an expensive company car. I own 80% of my company; three people own the other 20%. How can I protect myself against such a lawsuit?
Answer: Whenever there are minority owners, you have potential problems. As the principal owner and decision maker in your company, conflicts of interest can arise on whose interests you best serve - yours or the corporation's. As a board member, you are supposed to watch out for the interests of all owners, not your own. The best ways to protect yourself from conflict-of-interest claims are:
• Refrain from voting on any company matter that personally affects you. For example, allow your other board members to approve your compensation,
benefits, etc.
• Deal with your business on an arm's-length basis, that is, as if you were dealing with an independent, unrelated person. Don't treat the business as if it were your personal source of money, benefits, etc.
To protect yourself, put an indemnification clause in your company's bylaws. You might also consider buying indemnification insurance.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2010.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
D.L. Perkins, LLC is solely responsible for this content.
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