Why Your Business Entities’ Governing Documents Are Important

In this episode of Coffee with Carl, attorney Carl Zoellner explains why need to make sure you have the right governing documents for your business entities. 

Hello everyone!

Welcome to another episode of Coffee with Carl. I am your host, Carl Zoellner, one of the attorneys here with Anderson Business Advisors.

Today I want to talk about your business entities’ governing documents and why they’re so important. 

For an LLC, your governing documents would be your operating agreement. For your corporation, your governing documents would be your bylaws. 

Many times, when we get clients that have pre-existing entities, they want to know, “Can we save them? Are there things we can do to retain those entities?” 

And the answer is yes!

It starts with getting those internal documents up to par. Entity mills that create operating agreements and bylaws don’t address a lot of the issues that are important to your business. What those documents are intended to do is to decide what matters are common to your business. 

So we’d like to have things in writing with those documents that say, “If this scenario happens, then this is how it should be decided.” 

We do that so that the third party that’s reviewing them—which in the court scenario would most likely be a judge—can say, “Well, this is what the documents say. So this is how the decision should be made.” 

In an operating agreement or bylaws, there is a basic level of, “if you don’t have an operating agreement, here’s how your entity functions.

In almost every state—if you look at your state’s laws in regards to operating agreements and bylaws—many times, you’re going to see a reference to “Unless otherwise noted in…either the operating agreement or bylaws this is the standard.” 

The problem is that you can actually step on some of the basic protections your state offers by having a bad operating agreement. It’s not a matter of “It’s better than nothing.” Sometimes it’s NOT better than nothing if you’re actually stepping on some of your state’s basics on what your state already affords you through their basic level of law. 

But on the other side, if we’re shooting for the best possible route—or best practice—we also want to take advantage and make sure we’re getting the maximum amount of protection we can have within our business entity. That’s why good internal documents are so important. 

The Takeaway

There are lots of videos out there from Anderson. Michael and Clint have put out videos on what items there should be in an operating agreement. Some of the items we review when we review operating agreements for our clients is just a continuation of that.

As a reminder: Something is often NOT better than nothing.

In a world where you can have the best—or the most protection—simply by having good governing documents, we’re going to try to take advantage of that to the fullest.

That’s part of our overall strategy, and that’s the basis of this video today. 

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

Additional Resources:

Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.

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