Whether you are borrowing money from a bank, non-bank lender, equity investor or your family, it is important to have certain legal documents in place. In this article, I am referring to the various documents that form and are used in governance of corporations, Limited Liability Companies (LLC), Limited Liability Partnerships (LLP), Professional Corporations (PC), and the various other types of legal entities that are “chartered” by the state that a company is organized in. In order to avoid confusion, I am going to use the term “corporate” but I am really referring to the equivalent document used for LLCs, LLPs, etc. For example, in a corporation, corporate bylaws are written, in an LLC, the equivalent document is called an organizational agreement. Having these documents is important, especially if you have more than 1 shareholder.
Lenders want to see these documents so they can know who in the corporation is permitted to sign loan documents, as well as which shareholders own a greater than 20% stake in the company. Most importantly, lenders want to loan money to well-run businesses and having well-written documents to govern your business with are evidence of running your business well.
In most states, these documents include:
- Corporate Charter
- Articles of Incorporation
- Certificate of Good Standing
- Corporate Bylaws
- Board of Director’s Minutes
Lenders often are impressed when they see an additional document called a “Buy/Sell Agreement.” This is an agreement between shareholders that outlines conditions which a shareholder might buy out another, and often specifies how the parties will determine a value. Often buy/sell agreements are funded with cash value life insurance. This document often contains succession conditions so if one shareholder dies, the business can buy out the heirs of the deceased shareholder.
Recently, I did a small consulting project for a company that is many years old. The company was started by a father and his adult son. The son has run the company very well through good times and bad. The father, a retired
About 10 years after starting the business, the father died. He had a small, not very well worded paragraph in his will leaving his interest in the business to his son. He left the rest of his estate to his wife. The son and his mother believed that the business was 100% owned by the son after the father died since that was what the father’s will provided, albeit poorly. They both believed that when she died, her heirs would understand that the late father’s interest in the business was not part of her estate.
About five years after the father died, the mother died. However, the other heirs of the mother’s estate contended that the son’s share of the mother’s estate should be offset by what was left by his father. The entire ordeal has left the family hurt and not speaking to each other. Had the father and son had a buy/sell agreement in place, this situation would be clearer to the heirs of the estate and the family would not be having a dispute.
My company, Business Finance Solutions provides free small business webinars to any small business owner who would like to attend. We do not try to sell anything, and truly try to provide a good educational experience for small business owners. On Wednesday May 27, 2008 at 10:00 AM CDT, our guest presenters are two attorneys well versed in small business formation and corporate governance. Their 1 hour presentation will be entitled, “Legal Considerations of Small Business Operation.” This interactive webinar will allow you to ask questions specific to your circumstances.
Should you like to attend, go to our webinar information page and reserve your seat.
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.