It’s Time to Check Up on Your Business’s Legal Health
By Elizabeth M. Sorokac, Esq.
It is 2020. We are in a new year and a new decade. Now is the time to check up on your business’s legal health. The need for an annual checkup is due to the nature of businesses, which experience cycles of change—both anticipated and unanticipated change. Changes in businesses affect many things, including a company’s bottom line and legal health. So, what kind of changes affect the legal health of your business? For example, changes in the ownership and structure of your business as well as changes in the way your business is run impact your company’s legal health.
Why Do Businesses Need a Checkup?
If your business is relatively new, you may be thinking “Is there really a need for an annual legal health checkup?” Take the typical scenario—an individual or group of individuals wants to form a new business. The business is formed through filings with the Nevada Secretary of State and the creation of corporate documents. Although it is recommended that this be done with the assistance of an attorney (and we have helped many clients through this process), often times and for a variety of reasons the Nevada Secretary of State filings and the corporate documents are done through an online form base or a pre-packaged set of documents. There is nothing wrong with this approach for new businesses, so long as it is done with the thought that the corporate documents will be regularly revisited once the business is up and running.
What Types of Changes Warrant a Business Checkup?
Now we fast forward one (or several) years in the life of the business. During this time, significant changes may have occurred the business. These changes can include any one or more of the following:
- the addition of a new owner;
- the death or incapacity of an owner;
- the marriage of an owner;
- the separation of the business into two different divisions;
- changes in the management of the business;
- the infusion of capital from the owner(s);
- the investment of funds by “silent” owners;
- changes in the tax election of the entity;
- offering ownership in the business to employees;
- changes in a company’s industry including changes in the regulation of the industry;
- purchasing real estate for the operation of the business; and
- changes in the threshold for selling all or substantially all of the company’s assets.
Due to changes in a business or the manner in which corporate governance documents were created, a business’s current corporate governance documents may not, but should, reflect the current state of a business. The legal health and wellness of a business is something business owners should be investing in to avoid adverse consequences.
What Should You do if There are Changes in Your Business?
In the event any of the changes listed above have occurred since the corporate documents were last reviewed, they should now be reviewed by your business’s counsel. Changes to the existing corporate documents may be necessary or new documents may be needed. For changes that are anticipated (for example, the upcoming marriage of an owner), documentation should be drafted regarding that owner’s interest in the company (for example, whether it will be held as sole and separate property or part of the new couple’s community property and what will happen to that owner’s interest in the event of the death or divorce of the owner). For changes that are unanticipated (for example, the death or incapacity of an owner), documentation should be drafted reflecting the treatment of that owner’s interest (for example, that it will be redeemed by the company, sold to a third party or held by the owner’s heirs or on behalf of the owner by the owner’s legal guardian).
An annual investment in the health of your business will keep your business well and up to date and will prevent many issues that arise when change cause your business to become unhealthy. Contact the attorneys in Reisman Sorokac’s Business Transactions department to check up on your business’s legal health.