Wednesday, October 7, 2009

Legal Assessments: Fundamental Value of a Separate Legal Business Structure – Part II

Last time I wrote on some of the basic reasons why having a separate business entity is important.  Specifically, it facilitates the business to becoming a distinct commodity apart from the individual or individuals who make up the business.  This post will help to identify how legal principles and structures can assist in establishing and facilitating the business’s separateness.

First, creating Articles of Organization or Incorporation establish the business structure.  When creating an LLC, the Articles of Organization notify the state that the entity has been formed.  Articles of Incorporation go a bit further and establish the fundamental structure of a corporation identifying the initial Board of Directors, the shares that are authorized and the like.  However, this is only a first step in creating a truly separate entity.

Second, beyond Articles are such documents as the Operating Agreement, the Bylaws, Buy-Sell Agreements, and Shareholder Agreements.  These legal documents are essentially contracts which can more specifically spell out the rights and responsibilities of the the various owners, the executive officers, and interested parties.  They can ensure that the business has a method for succession of ownership or authority, and an objective foundation on which to engage in business. Such documents are key to establishing who is responsible for different parts of a business’s operation, how the interested parties are to interact, how notice is given for major meetings and activities, and who has the authority to engage in activities on behalf of the business.  The documents not only provide the independent guidelines for how the business activities take place, they are designed to protect various interested parties from being taken advantage of and ensure a level of stability and accountability between the parties.  Solid formational documents provide a system and procedure for fair operation of the business, while also providing protection to the business when outside eyes examine the business.

Third, businesses should keep clear records of their activities whether it is Board minutes and resolutions, or the accounting of its revenue and expenses.  Letters reciting the business name and its actions and its business reasoning for such actions, can do a lot to not only provide an institutional memory, but also protect the individuals as they engage in business activities.  These documents demonstrate that the business is operating distinct from the individuals who make it up, give notice to the public of who is acting, and provide authority for the business to act.

Fourth, businesses can use various contracts and procedures within the business to establish the goals and purposes of the business.  A simple example is an employee handbook or a policy regarding public relations.  Businesses can use contracts with customers and suppliers to establish the scope of its engagement and how much it is going to give or receive in transactions.  Another example fundamental to establishing a business as a separate entity can be written procedures for how the business is to be accomplished to provide reliable service that is consistent with the business goals and purposes.

Finally, businesses that have a secure and clear identity apart from the individuals within, can build value into the company by presenting to the public, its partners, suppliers, and customers, a clear image of who it is, and what it does.  Such clarity helps to build strong relationships for continued and productive future interaction.  It also opens avenues for the creation of valuable trademarks, and an increased clear market presence.

When a company takes its distinct identity seriously, and uses legal tools available to it in a clear and effective manner, it creates opportunities for the company to add value to its operations.  These include making the most of the resources available to it and establishing a corporate identity that facilitates transactions and profit from the sale of its products or services.  It is able to protect itself and its assets by relying on the actions of the company apart from the individuals within.  In summary, it is able to present itself clearly and reliably to the persons that make up the business, the public, and to other companies so it can engage in business most efficiently.

Some very practical examples of how a distinct business entity can be advantageous are such things as building a credit history that can be used to obtain loans or a line of credit for operations and expansion.  Another is the creation of a business that has value regardless of whether the same people are working at the company facilitating investment and the continued operation of the business after key personal move on.  One can more easily sell for a premium ownership in a distinct business than in a business that is essentially tied to specific person or persons.  And another example is a distinct business protects the participants from tax and other liabilities because the documentation demonstrates the business apart from the persons engaged.

Future posts will more closely examine how some specific legal tools and principles can be used to help a business add value to its operations for its owners and participants.

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