Having your corporate documents in order takes meticulous effort, time, and knowledge of what investors, shareholders, and attorneys want to see. In practice, this can be difficult to achieve – but the benefits of doing so are significant. In this blog post, we’ll outline 3 huge benefits of engaging an attorney for a corporate clean-up at your company.
What is a Corporate Clean-up?
A corporate clean-up typically involves a corporate attorney examining your formation documents (including your bylaws, actions by incorporator and stock issuance documents), board meeting minutes and consents, and other agreements and contracts your business has entered. The attorney will check to ensure the necessary documents are in place and in order.
Benefits of Corporate Clean-up Services
You May Find It Easier to Attract Investment.
Whether you’re looking to attract funding, hoping to be acquired, or otherwise planning your exit, the process will run more smoothly if you have your corporate documents in order.
In terms of attracting funding, the reality is that for the vast majority of start-ups, investors are usually spoiled for choice. If your company doesn’t have the appropriate legal documents and agreements in place, potential investors may move on to consider a company that does. Organizing formal corporate documents takes time and many investors would prefer to spend that time hashing out the economics of an agreement and see their investment spend on advancing the venture, not checking in to see whether you’re organized yet.
As for being acquired, your corporate documents are going to play a key role in the due diligence process. If you don’t have everything organized in advance, the diligence process is going to take longer which can result in the deal being more expensive or you may receive less favorable terms. In some cases, it can result in the acquiring party losing interest – since poor corporate hygiene doesn’t always inspire confidence.
You Reduce Your Risk of ‘Piercing the Corporate Veil’.
One of the key benefits of creating a separate legal entity for your business (by either incorporating or setting up an LLC) is that you reduce your risk of being personally liable for debts of the business. Unfortunately, failing to keep your corporate house in order increases your risk of the ‘corporate veil’ being ‘pierced’ – which means that you may be held liable personally.
Certain oversights or practices can make this more likely, such as not having a separate business bank account for your legal entity. A failure to create and maintain formal and organized corporate documents can also put you at increased risk of a claim that the corporate veil has been pierced.
Engaging an attorney to complete a corporate clean-up provides you with an opportunity to ensure your corporate formation documents are in place and effective.
You Reduce Your Legal and Compliance Risk.
Keeping your corporate house in order can also help you reduce your legal and compliance risk, since these documents set the stage for your business operations, ownership, managerial relationships, dispute resolution, and more. However, many companies incorporate with very small legal budgets and very little time to spare for drafting effective formation documents. As a result, it’s not uncommon for companies to end up with missing or ineffective documents that, in effect, either increase or don’t minimize legal and compliance risk. A corporate clean-up can identify any legal risks stemming from early oversights before issues arise.
Finally, once you receive a notice of audit from the IRS or are subpoenaed or served in a lawsuit involving the business, it’s too late to ‘clean up’ your corporate books (including drafting minutes for director’s meetings or ratifying actions). While in most cases, getting your corporate documents in order is better late than never, so if you don’t have these documents prepared, you will likely benefit from a corporate clean-up.
If you need assistance getting (or keeping) your corporate house in order, ask us about our corporate clean up services. We’re here to help!
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