Many people dream of opening their own business and growing from those humble beginnings. Businesses might take on several locations, new partners and investors, and may merge with other businesses. Then, when time is of the essence, many of these business owners find out that they never completed the proper steps necessary to memorialize their initial business relationship. They are often left scrambling at the last second, trying to put past documents in place (and often backdating).
Unfortunately, most colleges and advanced degree programs do not teach the basics of setting up a business and the ins and outs of corporate governance. Many miss the crucial foundational steps of how to grow your business the correct way. Do not find yourself in this position. Here are some corporate governance initiatives you can undertake for an LLC and Corporation to prepare you for anything the future might bring.
You chose an LLC to be your vehicle of choice to carry out your business dealings. After all, the LLC is put forth as being the easiest to set up with little corporate governance or record keeping. It is marketed as being almost completely hands off except for the annual report required by the Secretary of State. Unfortunately, many business owners take this to heart. They file their articles of organization, and then do nothing else.
Many times, an LLC will have multiple members and still fail to do an operating agreement. Other than the LLC Act, the operating agreement memorializes everything the LLC does. Such as how the members cooperate, their membership interest amounts, how contributions work, and even how the manager might manage the LLC. Not having an operating agreement could prove disastrous should there be a disagreement between the members or if a member were to be incapacitated. LLCs with just one member should still have an operating agreement. If the LLC wants to take out a loan on an asset, gain ownership of another LLC, or hold property, the bank will require an operating agreement be in place.
Even with an LLC, good corporate records should still be kept. If votes need to happen because the business wants to move to a new site, do the proper resolution to memorialize the action. Want to admit a new member? Follow the operating agreement and carry out the proper resolution and document it. Nothing creates problems like an economic interest owner (or any entity or individual) trying to assert rights as a member because the LLC never properly documented who the members are.
Perhaps the promise of not having to do any corporate records or documentation for the LLC is carrying over to the corporations as well. One thing is for certain – you need to undertake steps when forming a corporation to protect yourself in the future. Is it a lot of work? Not really.
For simple corporations, once you get the main items out of the way, other than keeping minutes and maybe holding an annual meeting, there isn’t much else that needs to be done. Your bylaws, akin to an operating agreement in a sense, are what govern how a corporation carries on its business, and are typically easier to draft than an operating agreement. Make sure you do your bylaws.
Do not stop there. Carry out your initial meeting by putting a copy of the filed articles of incorporation in the corporate records, adopt those bylaws you just drafted, distribute your stock to the shareholders, and elect directors. After that, directors should elect the corporate officers. Consider putting in place a shareholder’s agreement or buy/sell agreement. These types of agreements do things such as restrict transfer of shares, put in place first rights of refusal, and outline what happens should a shareholder become incapacitated.
You might think to yourself, “I will do this in the future” or “it’s not necessary.” But keep in mind that one day you might want to sell some of your shares. To sell your shares, you actually have to hold your shares – and shares are normally distributed in the initial meeting. To top it off, don’t forget to follow those bylaws when transferring shares. You might have to get Board approval to do so and have the stock ledger updated.
Not sure if you have done all of this? Give us a call. Keeping up with all the corporate records and corporate governance might seem like a lot. When in reality, if it is done at the proper time it is quite manageable. Staying on top of corporate governance will save your business money in the long run, protect your business, and keep your business nimble and ready to move in whatever direction it needs too.