Annual Review of Your Company’s Legal Documents
Once a year, you should review all your corporate documents and update them as necessary.
In
this column, 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 one shareholder.
Keeping good corporate records is important to keep your company prepared for potential borrowing needs.
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 (at least annually)
- Capitalization table updates
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.
Not having good corporate documents can put your company at risk.
It
is every company board of director’s nightmare to strike it rich then
suddenly find people claiming they had an ownership stake in the
company. The movie “The Social Network” a popular movie released last
year chronicles the alleged tremendous growth of the company and the
legal issues it has faced from people who have come forward claiming to
be original founders of the company. To avoid such a situation where
people come forward claiming to be original founders, it is important to
have complete corporate records.
An annual review should be part of that process.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
Direct Email: sam@lesliethacker.com
Twitter: SMBFinance
