By Eric D. Morton
Corporate and contract formalities are important, and often overlooked or minimized. If you don’t memorialize the terms AND ensure that all the parties have validly executed a partnership agreement, you can expect to have headaches, at a minimum, and you could put significant rights or investments at risk. Failing to sign documents or properly prepare them can lead to disaster. From time to time, I handle disputes in which agreements or entity documents were unsigned, or badly written. Just this year, I had several matters where the parties involved simply did not the execute agreements that were designed to prevent their disputes or resolve them if they did arise.
Unfortunately, clients sometimes gloss over formalities without thinking through the consequences. If you fail to properly execute and maintain your corporate governance documents, for example, the shareholders of the corporation could be held personally liable for business debts. You might be precluded from resolving a dispute among the LLC members if you haven’t executed the operating agreement.
The same can be said for other documents like estate plans. Yes, you need to get that amendment to your trust signed and notarized.
Why is this important?
Attorneys assume that every contract must be proven in a court of law. Written agreements that are executed by the parties provide the strongest proof of the actual agreement of the parties. This doesn’t mean that unwritten contracts can’t be enforced. But it’s usually more difficult to enforce an oral agreement and, in some cases like estate planning, an unwritten provision can’t be enforced at all.
Bear in mind that organizing documents and the agreements between the parties remain relevant for years after the corporation or LLC is formed. Bylaws and operating agreements continue to govern an entity even if no one has reviewed them for years. Sometimes, the founders of a company have left but the successor owners are still bound by the original organizational documents. If those documents are incomplete or not signed, chaos can ensure. If you fail to file a sub-chapter S election because you didn’t get around to signing and mailing it, you could face serious tax problems.
What to do?
- Take legal formalities seriously. Don’t be one of those business owners or entrepreneurs who doesn’t have time for corporeate formalities. An “it won’t happen to me” attitude could be fatal, and is rarely a sound business strategy.
- Don’t use stock forms. Legal forms found on the Internet or provided by a legal forms company may work for some purposes, but only if you understand exactly what they mean and the potential consequences of using them. Many a lawsuit was launched by the use of a badly used legal form.
- Follow up. Take an interest in proper contract management and business governance. “Dot the i’s and cross the t’s” on all of your business records, including contracts, board minutes, bylaws, operating agreements, amendments, tax documents, compliance records, employee records, and others. I can guarantee that if you care for your business records, you will have fewer problems and better results, every time.
Successful business owners pay careful attention to their cash flow and finances. Likewise, business owners can avoid distractions and potential disasters if they pay attention to their legal affairs, execute their documents, and maintain all of their records properly.
Eric D. Morton is the principal attorney of Clear Sky Law Group. Clear Sky Laws Group assists its clients with contract negotiation, drafting and management. The firm also advises its clients in corporate governance and has systems for maintaining its clients’ entities. Eric can be reached at 760-722-6582 or 510-556-0367, and firstname.lastname@example.org.