If you are the owner of a corporation or LLC, you should have a set of governance documents outlining how your entity is supposed to run. For corporations, these documents include bylaws. For LLCs, they include an operating agreement.
Chances are, if you own or manage a small business, your governance documents may be sitting in a binder somewhere, collecting dust, just like the exercise equipment you bought last January.
But, also like the exercise equipment, now is a great time to dust them off.
Break Out Your Corporate Records
It’s important to get your corporate records out, read through them from time to time, and ask yourself:
- Are you documenting who your board members and officers are from year to year?
- Do their titles match the titles set out in your bylaws / operating agreement?
- Does the number of board members match the number allowed in your bylaws / operating agreement?
- Are you holding meetings when you need to, or at least documenting what major decisions were made without a formal meeting, with signed consents from those who approved those decisions?
- Are you generally running the business the way your bylaws / operating agreement say you will?
If your answer to any of these questions is no, you may wonder how important these business formalities really are.
Eliminate Those Risks
The reality is that failing to follow these formalities might never lead to a problem, but it also creates unnecessary risk for you and your company. If you aren’t following the formalities and keeping your company records up to date, it could make it more difficult to deal with disputes down the road between owners.
It could also make it more difficult to obtain financing, since banks like to see that you are running your business in a predictable way and have all the necessary consents for the decisions you are making.
And, failing to follow your governance documents can undermine the liability protections that corporations and LLCs are intended to provide in the first place, making it more likely that a court could “pierce the corporate veil” under some circumstances and reach to owners’ personal assets in the event of a judgment against the company.
Be Mindful of Your Company’s Health
So make a New Year’s resolution to read through your company’s governance documents and make sure you are following them.
If you find you don’t have any, or if you need any assistance getting them up to date, remember that your friendly local attorneys at McCarty Law are always here to help!
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