Key Questions For Organizational Documents

Posted by: Pierson W. Backes | Posted on: April 15th, 2014 | 0 Comments

As noted previously, the first step in setting up a new company, registering it with the state, may not seem so hard.  The form is very short.  In New Jersey it can be completed and submitted online.  However, the crucial governing documents of a company are the terms adopted by the company to govern itself, within the parameters set by the law (for a corporation, the by-laws; for a partnership or limited partnership, the partnership agreement; for an LLC, the operating agreement.)

A web search turns up many companies offering corporate kits, and some will include sample by-laws or operating agreements (note, these still need to be completed and adopted – they are a form with blanks).  In general, those forms are lacking in some of the most crucial particulars that are specific to your business and your relationship to any other investors or managers.

The by-laws, partnership agreement or LLC operating agreement are the governing documents that determine issues among the members and managers.

Just a sampling of the possibly awkward – but important- things to address:

(i) If a party is making a capital contribution of professional services, “expertise”, “time and effort” or the like, what is the dollar value being put on that contribution?  What are the standards for amount of time invested (full time? part time?  as needed?)  and quality of the effort?

(ii)  Is the company managed by a manager, or by the members?  If the latter, and there is an even split of opinion on a matter, how will it get resolved?

(iii)  Can a director/general partner/manager be removed?  How and when?

(iv)  Under what circumstances can an investor choose to, or be asked to, withdraw?

(v)  Can additional owners be admitted?  Who needs to consent to this?  (Adding more owners raises working capital but “dilutes” each person’s ownership).

(vi)  Who has authority to borrow money or to sign contracts for the company?

(vii)  Are there going to be classes of membership, some of whom may receive different allocations, distributions or dividends than others?

(viii) Can investors sell their interests to anyone else?  (usually, not)

(ix) What happens in the event of the death, disability, bankruptcy, divorce or other adverse event with an investor or manager?   Will the company be dissolved?  Do his heirs get his interest?  Is there a buy-out?

(x) Does everyone share the same understanding about loaning the company money, versus making an equity investment?  Have they acknowledged in writing that there is no market for their shares and no guarantee of receiving their investment back?  Investors should sign a subscription agreement with these and additional disclosures, to help protect the company and its managers from charges of securities fraud.

(xi)  Do you understand the parameters for trying to raise money from other people?  In theory, you cannot offer or sell securities without a prospectus in a form prescribed by the United States Securities and Exchange Commission.  While there are certain exemptions that fit most small-business situations, you have to know and stay within their boundaries.   All certificates should bear a legend such as that below.

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION IN FORM AND FROM COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

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