So you’ve taken the plunge and started your own business venture. Now you have a shiny new corporation or limited liability company and are offering the products and services that only you can provide. Maybe you’ve hired some employees or attracted some outside investors. Things can get complicated quickly.
While you have been there every step of the way and hopefully have a good memory of everything that has happened in your company since day one, the company itself, alas, has no memory at all. Though it may seem obvious, your corporate recordkeeping is the only way that the company’s ownership, governing documents, financial and tax records, and authorizations and actions taken can be memorialized. While this is obviously important on a day to day basis, maintaining good corporate records can be crucial to an exit or other fundamental transaction.
Maintaining Your Governing Documents
As we’ve discussed elsewhere on this site, a company’s governing documents are fundamental in that they set forth what the company can and cannot do and how it needs to be organized and managed. For a corporation this would include its articles of incorporation and bylaws, and most likely a shareholders agreement or other agreements among the company and its shareholders. For a limited liability company this would be its certificate of organization and its operating agreement. These documents, as well as duly adopted amendments, should be kept right at the beginning of your company’s minute books so that they are always easily accessible and there is no question about what requirements and restrictions are imposed on the business. It is a best practice to include any amendments to these documents as soon as they are made so that you do not need to scour the rest of the company’s records to find whether any amendments exist. Additionally, it is a good idea to keep old or superseded versions of the documents as well; this assists in reviewing prior corporate actions that took place under old governing documents.
Recording Ownership Structure
Equally important are the records regarding the business’s ownership structure. If you start your own corporation and are the sole shareholder, this seems trivial. It is vitally important, however, that you have a capitalization table, stockholder list, and stock ledger set up from day one—and stay on top of it. Setting aside an option pool and granting awards, selling some preferred stock, granting shares to a new officer—these are all very common for early stage ventures and can add complexity to your capitalization in very short order.
The Cap Table
The capitalization table (or “cap table”) sets forth every equityholder in the company along with the number of shares or membership interests they hold, as well as showing what each person’s ownership percentage looks like on a “fully diluted” basis (and therefore even listing investors holding convertible debt securities). Beyond showing the ownership structure of the company at a particular moment in time, the cap table can let all current investors know what kind of dilution they will undergo in the event a new round of financing is undertaken. Additionally, the cap table is vital in assisting with the “waterfall analysis”—determining the exact amounts different investors will receive in a liquidation event or other exit scenario.
The Stock Ledger
The stock ledger (used for corporations and limited liability companies that issue membership units as opposed to merely membership interests) details the issuance and cancellation of every grant of stock and stock certificate. The stock ledger works hand in hand with the cap table, because it does not itself provide ownership breakdowns yet provides a more detailed understanding of how every grant or transfer of stock was made. It is crucial that both the cap table and stock ledger are kept up to date with every single transaction involving the company’s securities. It is possible for poor capitalization records to kill a deal if a potential buyer feels that he cannot be certain everyone is being paid off properly in the course of the transaction.
Keeping Accurate Minutes
The minutes of the meetings of the board of directors and shareholders (or managers and members for a limited liability company), as well as any written consents, are the official “corporate memory” of the company. The minutes provide a narrative of topics discussed, plans that were developed, and actions that were taken or approved. Generally actions are taken via resolutions adopted by the body in question; it is essential that record of the resolutions adopted by the governing body of the company are maintained, for many reasons. Banks may be unwilling to lend money without viewing the records to ensure the company has properly authorized the loan transaction. Potential buyers or business partners may require proof that the company or its officers have been authorized to proceed with the transaction or contract in question. Questions could even arise as to the scope of the power and authority of the president or CEO in general, which would require reviewing the authorizing resolutions of the board.
Financial and Tax Records
It is important for a company to maintain copies of its financial and tax records. A tax audit could arise several years after the filing in question, and the company must also provide its investors with certain financial information to assist in the preparation of their own tax returns.
Records of Other Corporate Documents
Finally, as obvious as it may seem, it is a best practice for the company to maintain copies of any contract it enters into, as well as all amendments and modifications later adopted. These could range from employment agreements for officers to contracts for advisors, suppliers, or purchasers. In the event any dispute arises, having quick and easy access to the relevant agreements is crucial. Additionally, any potential exit will involve providing copies of all of your material agreements to the potential buyer. Establishing and maintaining a thorough recordkeeping policy now will make life easier for you and your company down the road.