Why Your Business Formation Documents Are So Important

business_formation

Are Your Business Formation Documents Up To Date?

Whether you are setting up your own business for the first time or have been in business for many years, it is important to understand the different documents that are necessary for your business entity to stay in good standing and how to keep those documents up to date. So often, business owners are so busy with the day-to-day operations of their business, and they forget to address these important details, but there can be significant risks for you and your business if these documents are not kept up to date. This article discusses some of the documents that are required for an LLC (which is by far the business entity of choice these days) and discusses why these documents are so important.

Key Documents for an LLC

The key documents for an LLC’s are as follows:

  • Articles of Organization. The Articles of Organization need to be filed with the Arizona Corporation Commission in order to create an LLC in Arizona. Typically, the Articles of Organization have very little information beyond the name of the LLC, the address of the LLC, the name and address of the statutory agent, the type of LLC (member-managed or manager-managed), the ownership, and the manager (if applicable).
  • Operating Agreement. The Operating Agreement is a private document that does not need to be filed with the Arizona Corporation Commission. It contains more detailed information about the ownership, distributions, management, and operations of the LLC. Although not required by Arizona law, without this document, the members are stuck with the statutory default language regarding the LLC.
  • SS-4 (to obtain an EIN number). This IRS form allows the LLC to obtain an EIN number for tax filing purposes. When opening a bank account for the LLC, the bank will want a copy of the approved Articles of Organization and the EIN number for the LLC.
  • Affidavit of Publication. Arizona law requires that the Articles of Organization shall be published as set forth in the Arizona statutes. I typically recommend that an Affidavit of Publication be filed with the Arizona Corporation Commission as well.  Without this publication, the LLC may not be a valid LLC under Arizona law.
  • Members’ Agreement.  This document is optional. I typically use it if more detailed buy-sell provisions are required. However, the buy-sell language can also be included in the Operating Agreement.

What Are the Key Times When Your Formation Documents Are Important

These formation are important at the following times:

  1. At Start-Up. Typically, the bank and others will want a copy of the Articles of Organization and the EIN number.
  2. When Adding a Business Partner. Any potential business partner will want a copy of these formation documents in order to see what they say about the ownership, operation, and management of the LLC. These documents may also need to be amended when a new member is added.
  3. When Selling Your Business.  When a third party is purchasing your business, they will want to see all of these documents as part of their due diligence for the purchase. If needed, these documents can be updated or amended prior to disclosing them to a potential buyer.
  4. When a Member Wants to Sell an Interest to a Third Party. These documents often restrict each member’s right to sell their membership interest in the LLC, and they will also include procedures for how a member can sell his or her membership interest to a third party.
  5. When There is a Dispute Between the Members of the LLC. Usually, the Operating Agreement sets forth how disputes are resolved. It also includes language about how decisions are made and who is in charge of making them.
  6. When There is a Lawsuit Against the LLC. When a third party has filed a lawsuit against the LLC or is threatening to do so, they will often ask for copies of these documents to make sure that the LLC has been set up properly. If the LLC has been set up properly, then there will be liability protection for the individual members of the LLC for the LLC’s obligations. If the LLC has not been set up properly, then the individual members may be at risk under a theory similar to “piercing the corporate veil” for corporations.
  7. When a Member Dies. The Operating Agreement typically has language to address what happens to a member’s interest when he or she passes away.  Typically, there will either be the ability to pass on such membership interest to the deceased member’s family or a right given to the other LLC members to buy such interest from the deceased member’s family.

Thus, it is extremely important that your LLC formation documents are kept up to date in case they are needed in any of these situations.

Call me today – 602.277.7000

John Even

 

 

 

 

 

Our firm has helped families and business owners just like yours handle a wide variety of business planning, estate planning, probate, and trust administration issues.  In particular, we have many years of experience handling all different kinds of business and estate planning, probate, trust administration, guardianship, and conservatorship matters. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.

 


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