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Five Foundation Documents Your Business Can’t (shouldn’t) Live Without

Your business is like your house.  If your house has a weak foundation, you’re not replacing the roof until you fix that problem.  If your home’s foundation is rock solid, you can change the roof, and even add a floor, whenever you like.  It’s exactly the same for your business.

Every business needs a solid foundation. At a minimum, your business needs the following five foundation documents:

a shareholders’ agreement for a corporation,

a partnership agreement for a partnership, or an operating agreement for a limited liability company,

a checklist for corporate governance,

a written business plan,

a non-disclosure and confidentiality agreement, and
an employee handbook.

For those business owners who are too lazy to put their business arrangements in writing, the New York State Legislature has graciously created the Business Corporation Law, the Partnership Law, and the Limited Liability Company Law. Now, the Legislature doesn’t know you, it doesn’t know your business partners, and it certainly doesn’t know about your specific deals, agreements, or arrangements. And, it doesn’t care.

The best that the Legislature could do was to create a baseline designed to prevent chaos among inattentive business owners when things inevitably go wrong. However, with those general laws came a gift for engaged, active, and attentive business owners. Almost all of the governing laws can be changed by a written agreement among the owners to accommodate their particular wishes. So, a shareholders’, partnership, or operating agreement is essential for every business.

Those governance documents allow the owners to decide (a) how they will govern themselves, (b) how they will share profits and losses, (c) what their rights and obligations are to the business and to each other, and (d) perhaps most importantly, control their ability to transfer their equity in the business. Absent those foundational documents, the Legislature has made those decisions for you. I guarantee that, when your business hits the unavoidable “bump in the road”, you won’t like its choices.

When was the last time that your business held an annual shareholders’ meeting, or a meeting of the board of directors? Are there written authorizations or minutes for all of your key corporate agreements and transactions? When was the last time that anyone in the company even looked at the stock record ledger? Businesses can exist for decades without adhering to the best practices for corporate governance. That is, until they face a major transaction or some legal challenge. Failure to observe corporate formalities can cause delays in obtaining financing, interfere with a sale of the business, and, in the worst case, lead to personal liability for you, the business owner. The best practices for corporate governance are designed to protect the company and the owners by documenting the processes by which major decisions are made and important transactions are concluded. Those best practices insure that the owners treated the business as a separate legal entity and not simply as an extension of themselves. A checklist prepared by an experienced corporate lawyer makes the process inexpensive and painless to follow.

Some businesses operate under that Yogi Berra quote – “if you come to a fork in the road, take it.”  It might have worked for Yogi, but it won’t work for you.  A business plan may not be a legal document, but it’s going to be required by a bank or a buyer if you ever decide to seek financing or to sell your business. Your business plan can be one page or one hundred pages, as long as it provides clarity on your business’s opportunity and your roadmap to get there.  Without a real business plan, another Yogi quote will definitely apply to your company –  “if you don’t know where you’re going, you’ll end up someplace else.” 

Believe it or not, your business has secrets and those secrets deserve protection.  Maybe it’s a long cultivated customer list.  Maybe it’s financial records or pricing plans.  A non-disclosure agreement is the first step toward protecting that information.  It creates a confidential relationship with your contractors, business associates, and your employees that prevents them from disclosing what they saw when they got a peek at the Great and Powerful Oz behind the curtain.  A Non-Disclosure and Confidentiality Agreement – it’s simple, it’s painless, and it’s necessary.

Speaking of employees, how do they know the rules unless you tell them?  How do you discipline someone for “stepping out of line” when you never actually pointed the line out to them?  An employee handbook is a crucial document that enables employers to set and to maintain the rules, regulations, and requirements of employment.  Without a well drafted employee handbook, and the human resources, procedures necessary to enforce ever changing labor laws, businesses are at risk from their employees and the Department of Labor.