Could Messy Corporate Records Cost You?

December 3, 2019

Whether just starting a venture or developing a hot emerging business over time, entrepreneurs spend a significant amount of time responding to requests about financial projections and intellectual property. While many entrepreneurs focus on their financial and IP-related information, they often overlook fundamental corporate business, formation, governance, and capitalization records. Whether you want to open a bank account, close a financing round, or lay the foundation for a future high-value exit, having up-to-date, accurate, and complete records is essential and required by any investor, financier, or buyer worth their salt. Entrepreneurs that can quickly present such records will have a significant advantage.

  1. What are corporate records?

The appropriate records to maintain depends on the type of entity you form to operate your business (e.g., corporation vs. limited liability company). In any event, when lawyers, accountants, investors, and regulators refer to “corporate records,” they are typically referring to:

Formation Documents – All documents and other instruments filed with the state authority when the business entity is formed, such as articles of incorporation, articles of organization, certificates of formation, or certificates of organization, as well as related status certificates and amendments.

Governance Documents – All documents regulating the governance, management, and operation of the company, such as bylaws for a corporation or the operating agreement for an LLC, as well as employee and independent contractor incentive plans and any agreements among the equity holders of the company, in particular voting and other agreements relating to the transfer of shares.

Capitalization Documents – A ledger or ownership registry that provides a listing of the company owners and any stock certificates, subscription agreements, and related documents evidencing each owner’s interest in the company.

Minute Book and Resolutions – All actions of the board of directors, managers, and senior management should be recorded, including detailed “minutes” memorializing meetings and decisions of the board or owners and any written consents, as well as resolutions adopted by the board and owners in connection with any meetings and written consents.

A complete list of corporate records all entrepreneurs should maintain is available here.  

  1. What do I need to do to maintain corporate records?

Keep everything in one place–whether that is a secure online data room or a filing cabinet–and verify that all necessary officers or key employees have access.

Make sure you have fully executed and dated final copies of all documents. All too often companies fail to retain fully executed final copies of corporate documents, such as an equity award to an employee or an amendment to the operating agreement. Obtain all required signatures, including agreements with principals, key employees, and others close to the company. Sign it, date it, and store it.

Periodically review corporate records to ensure they are up to date and reflect any amendments, modifications, or additions. This will allow you to focus on running your business when your company is on the verge of closing its next crucial financing round.

Consult with an attorney who can advise you on the proper form(s) of all regular corporate records, as well as provide guidance on formalizing any special company activities for corporate records.

  1. How will maintaining corporate records help me close bigger deals–with better partners–and for more money?

Ongoing maintenance and upkeep of your company’s corporate records will significantly minimize the time and cost needed for any third party–whether financer, buyer, potential management level employee, or consultant–to diligence your company and understand its state of affairs. A streamlined diligence process simplifies a transaction, increasing the likelihood of a successful closing. It also reduces the opportunity for a potential investor, financier, or buyer to walk away from or renegotiate the terms of your deal. Keeping a close eye on your corporate records will give you the opportunity to identify and correct any shortcomings, saving you the time and money necessary to fix the mistake during the heat of a deal.

So, what should you do to get your company’s corporate records in order?

Start now. Locate copies of all of your corporate records. Make sure everything is signed and countersigned as necessary. Ensure that any equity transfers are properly documented. Finally, work with an attorney who can help you establish a process and provide guidance on how to make creating and maintaining your corporate records more efficient and useful. A little work now will lead to better results when it matters most.