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Spring Cleaning for Your Business?

Well, Spring has definitely sprung! And in Arizona, we skipped right past Spring and into Summer in about a week. I know that you probably do “Spring cleaning” at your house every year about this time, but when is the last time that you did “Spring cleaning” for the important legal documents in your business? Just like that unruly closet at home that gets out of control over time if you don’t clean it out once a year or so, the same thing can happen to these important documents. This blog gives you a checklist of some business documents that you need to take a look at every year or so and also indicates why these business documents are so important.

What Business Documents Are You Talking About?

If your business is a corporation, then you should take out and read the following documents every year or two to make sure that they are still accurate and up to date: (1) Articles of Incorporation; (2) Bylaws; (3) Annual Minutes for Shareholders and Directors; and (4) Any other Shareholder Agreements. If your business is an LLC, look at these documents every year or two: (1) Articles of Organization; (2) Operating Agreement; and (3) Any other Member Agreements. The other documents that are critical to your business are your business succession planning documents and your buy/sell agreements. These documents describe what happens to your business if something happens to you. And just like your estate planning documents, these documents need to be reviewed and updated on a regular basis too (including the life insurance coverage that is related to such documents).

Why Are These Business Documents So Important?

These documents are extremely important at all of the following times:

A.  At Start-Up. Typically, the bank and others will want a copy of the Company’s Articles of Organization or Articles of Incorporation and its EIN number.

B.  When Adding a Business Partner. Any potential business partner will want to see a copy of these business documents in order to see what they say about the ownership, operation, and management of the Company.

C.  When Selling Your Business. When a third party is purchasing your business, he or she will want to see all of these business documents as part of the due diligence for the purchase. If needed, these documents are often updated or amended accordingly prior to disclosing them to a potential buyer.

D.  When an Owner Wants to Sell an Interest to a Third Party. These documents often restrict each owner’s right to sell their membership interest in the Company, and they will also have procedures for how an owner can sell his or her interest to a third party.

E.  When There is a Dispute Between the Owners of the Company. Usually, the Operating Agreement or Shareholder Agreement sets forth how disputes are resolved. They also include language about how decisions are made and who is in charge of making them.

F.  When There is a Lawsuit Against the Company. When a third party has filed a lawsuit or is threatening to do so, such party will often ask for copies of these business documents to make sure that they have been set up properly. If they have been set up properly, then there will be liability protection for the individual owners of the corporation or LLC regarding the Company’s obligations. If they are not set up properly, then the individual owners may be at risk under a “piercing the corporate veil” type theory.

G.  When an Owner Dies. The Operating Agreement or Shareholder Agreement typically has language to address what happens to an owner’s interest when he or she passes away. Typically, there will either be the ability to pass on such interest to the deceased owner’s family or a right given to the other owners to buy such interest from the deceased owner’s family.

For all of these reasons and at all of these times, it is extremely important that these business documents are kept up to date.

Need help? Please call me today – 602.277.7000

John Even

Our firm has helped hundreds of families just like yours handle a wide variety of business planning, estate planning, probate, and elder law issues. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.

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