Why Corporate Records Matter
August 10, 2023 | Carole Clark Isakson
Most people know that a key step in starting a business is creating an entity (an entity can protect your personal assets). Many of those people will go online to the Secretary of State website, find the form for Articles, and complete those online. With Articles in hand the company can now get an EIN. But is that enough? Are you going to have all the benefits of running the business as an entity if you only take these two steps? Read our blog to understand why corporate records matter.
The short answer is NO
Some of the reasons for this answer are simple:
- A fully formed entity also needs documents that show who owns it, and how the company will be run, among other things. Those initial documents won’t show who actually owns the company or who the officers are, and they don’t contain any rules on how the company will be operated.
- Some specialized types of entities require provisions that aren’t in those forms but are required by law.
The importance of complete corporate records
At least once a month we interact with clients with ongoing businesses that realize they never really finished forming the entity – and now are trying to sell it, or get a loan, or defend a lawsuit. In all those cases, the failure to complete the company records can have a negative impact. Complete corporate records will generally be required to sell the company, and while those can sometimes be reconstructed it can certainly slow down the transaction. In some cases, reconstructing records requires signatures of persons no longer available, further complicating matters. An incomplete set of formation documents can also cause buyers to question whether the rest of the company operations have been run properly.
If you set up a corporation and only filed the Articles of Incorporation, at a MINIMUM you are missing Bylaws, opening minutes, subscriptions agreements and stock certificates; corporations with more than one shareholder should also have a buy-sell or similar agreement in place (watch for my future blog on this topic). If you set up a limited liability company and only filed the Articles, you are missing an Operating Agreement, opening minutes and subscription agreements. These documents are not just boilerplate, the terms in them should be discussed and agreed upon by all owners and should be given careful thought.
If your company applies for a loan or enters into certain types of contracts the bank/other party will also want to see that you have complete corporate records, and having Articles and an Employer ID number is not a complete set of records. This will delay your loan or contract as you complete the missing documents. Finally, not having a complete set of formation agreements can expose you and your company to claims by creditors who are trying to reach past the corporate/entity shield. While the lack of complete formation documents is not enough for a plaintiff to prevail in that type of lawsuit, it may well be cited as evidence in the plaintiff’s case.
Completing your formation documents is not complicated but should be done correctly. If you did not use BGS to set up your company, please review your company records and contact us if they are not complete. Corporate attorneys Carole Clark Isakson, Scott M. Hagel, and Pedro Herrera are all available to help in this area.