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:

1. Corporate Charter
2. Articles of Incorporation
3. Certificate of Good Standing
4. Corporate Bylaws
5. Board of Director’s Minutes (at least annually)
6. 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

Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
Direct Email: sam@lesliethacker.com
Twitter: SMBFinance

About Jason Myers

Jason Myers is the editor-in-chief of the Texas Entrepreneur Network and can be reached at jason@txenetworks.com