You're thinking of starting a business. You might have researched the requirements for legally forming a business in your state, which usually means filing certain documents with the secretary of state. Is this all you need to do? Are there any additional documents or agreements you should have in place? While your state may not require additional documents be filed, many companies will want to create additional internal documents governing the company, perhaps for the reasons described in this post.
Common formation documents include bylaws or an operating agreement, depending on the type of entity you filed; resolutions confirming your officers and/or board members, and setting forth the ownership of your company, if there are multiple owners or members; and certain agreements for founders, depending on your business, which may include intellectual property transfer agreements, or vesting agreements for the founders' equity.
One of the primary reasons often set forth for creating such formation documents is to avoid statutory construction for the governance of your business. In Indiana and other states, statutes governing entities like corporations and limited liability companies often include language such as "Unless the articles of incorporation or bylaws provide otherwise…". With such wording, the statute is allowing your business to set forth your own rule. However, unless there are bylaws in place, your business would be subject to the provision as set forth in the statute.
With that said, for many small businesses, statutory construction for many aspects of your business may not result in unintended consequences. However, avoiding statutory construction is not the only reason to create formation documents for your business. Without appropriate formation documents covering these issues, you could run into the following questions or issues affecting your business:
- What percentage ownership does each owner or member have?
- If an owner or member leaves the company, what happens to his or her ownership interest?
- Do all parties owning a percentage of the company have the right to make decisions day to day, or should specific officers, or a board, to have the ability to make those decisions?
- If intellectual property is created, does the company own that intellectual property, or could it leave with the owner?
- If an owner or member leaves the company quickly after the company is created, would that owner still have a right to his or her full ownership interest?
- If an owner or member leaves the company, can they compete with your company immediately after leaving?
- What percentage of owners or members needs to agree for major company decisions? Would a simple majority, unanimity, or another number be required
- How can owners or members remove an officer or board member if that becomes necessary or advisable?
If such details aren't set forth in your company's formation documents, you may find your business in a situation that has long-term implications, either for certain owners, or the viability of the business as a whole. In addition to the obvious complications arising from the above questions, investors may be wary of investing in a company that uncertainty in these areas. In any case, your business will generally enjoy more certainty and less risk if you have common formation documents in place.
If you’re a new business seeking formation advice, Gutwein Law can help guide you through the above and any additional questions you may have. If you’re ready to get the conversation started, call us at 765.423.7900 or fill out the form on our website.