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4 Must Have Legal Documents for New Business Owners

Whether you are a one-man computer whiz coding the next blockbuster iPhone app, or a five-employee manufacturer making parts for a Tier 1 auto supplier, you need basic corporate forms to protect your assets and investments. A limited liability company (or LLC) is the preferred way to organize and obtain this protection. Plus, if you ever apply for a business loan or decide to sell your business, having an organized and up-to-date corporate record book will do wonders to enhance your value. After all, when Google offers to buy your start-up for a couple million dollars, the transaction will go much smoother with an up-to-date Operating Agreement, corporate consents, assignment documents, and annual statements for the buyer to review.

I recommend the following 4 must-have corporate documents for every business owner:

Articles of Organization – If you registered your LLC with the State of Michigan, you already filed the basic Articles as part of your initial paperwork. These Articles effectively form your LLC, set forth its name, purpose, duration, and designate a registered agent (or contact person) for your company. Even if you are a sole proprietor, it is worth spending the initial $50 filing fee (and the $25 renewal each subsequent year) to create an LLC. That way, your personal assets are separate from your business assets and are protected from both creditors and litigants.
Operating Agreement — While all LLCs have Articles of Organization, not all bother to have their attorney draft an Operating Agreement. An Operating Agreement sets the rules for how the company is run, including how many votes it takes to make a decision, who owns how many shares, and how shares are valued and transferred. This is a critical document that can prevent many disputes down the line, especially when there are multiple owners involved.
Written Consents/Resolutions – Written consents, or resolution, are records of the business’s decisions. The Operating Agreement will set forth the process for making decisions through written consents (as opposed to meetings). Even if you are the sole owner, it is critical that you draft and maintain written consents whenever the LLC acquires property, makes a distribution, sets a salary, has its annual meeting, or takes another material action. Written decision records help prevent future disputes and also ensure ongoing protection of the corporate form for the owners.
Assignments – If you decide to transfer shares to another LLC member or give an investor an equity stake, the share sale must be documented in an Assignment. The typical assignment document will set out the purpose of the transaction, the value exchanged, the final distribution of shares, and will address the assumption of company liabilities (if any) by the transferee. It may be tempting to simply exchange cash for a promise of membership, but a formal assignment will clearly define the parties’ rights and responsibilities, which will prevent future disputes.

Establishing the proper corporate forms and drafting the paperwork need not be expensive. An attorney will generally be able to register your LLC and draft an operating agreement for a couple thousand dollars. Written consents and assignments can then be created on an as-needed basis. This up-front investment is well-worth the protection that it provides for your assets, as well as protection from disputes and even intra-company litigation down the road.

BONUS TIP – just as critical as a good attorney, a business owner should consult with a reputable insurance provider and a CPA. A solid insurance policy and a tax expert to review your financials will protect you from the unexpected and likely save you money in the process.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

5 Often-Overlooked Essentials When Selling Your Business

You finally got that phone call from the California venture capital firm that wants to buy your start-up for a couple of million dollars. You are eager to sell and use that money to pursue other projects and passions. The attorneys and accountants have been retained, and the Asset Purchase Agreement has been drafted.

But while the attorney drafted the proper asset descriptions and indemnification clauses, and the accountant has allocated the purchase price for the taxes, has your team addressed these five often-overlooked essentials? After all, the sale of a business is much more than just signing the papers and turning over the keys.

Is the buyer hiring the existing employees? When transferring the assets of a business, one can easily overlook the employees who operate those assets and make the business run. Assuming that the buyer is buying the employees together with the business is a grave (and potentially costly) error. Most employees are at will and may walk out from their job if you spring a “surprise” acquisition on them one morning. This may especially be devastating in an industry like manufacturing, where qualified employees are difficult to find. To mitigate that risk, the buyer should provide offer packages to all current employees at least a few days before the sale. As a seller, it may benefit you to make a small monetary or personal gift to some of the long-time or more senior employees to thank them for their years of service and to throw a transition pizza party for the crew. Remember that the sale will be a personal and emotional event for those who work for you. While you are selling the machines and office furniture, the employees make the business run.
Are any key services performed by a family member or by the seller him or herself? In small businesses, owners often rely on their family members (or themselves) to perform certain key services (like quoting prices or estimating inventory) without a formal employment relationship. The seller should disclose any key services done by family members so that the buyer can make adequate provisions to hire someone to perform those key services. After all, the goal is to keep the business going after the sale and to provide for as few delays as possible.
What happens to the invoices and receivables received after closing? Continuing in the ordinary course of business, there will be both invoices and checks that the buyer receives post-closing. Who is responsible for the invoices for inventory received pre-closing? Who gets the checks for pre-closing product? And what about any open purchase orders – are those being assigned? To prevent future conflict, all of these topics should be addressed before the money is wired.
What about the building? If the seller owns the building and is selling that building with the business, the transaction is relatively straight-forward. But if there is a lease, the seller must obtain landlord’s consent before assigning the lease. Alternatively, the buyer must enter into a new lease that starts on the day of the closing to ensure a smooth transition and continued operations.
Have the customers been informed? It is a mistake to assume that the business’s customers will simply continue doing business with the new owner. Business is as much about relationships as it is about the numbers. The buyer and seller should discuss a transition plan with respect to existing customers and ensure that these valuable relationships are preserved going forward.

Of course, these are just some examples, and there will be other key topics specific to the nature of your business and to the transaction.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.