Starting a business can be one of the most fruitful and exciting ventures. After all, who wouldn’t want to take a big idea, turn it into action, and work for themselves? Obviously, though, there is a serious risk in starting a business. Mitigating those risks and making sure every partner is on the same page gives you a leg up on the competition.
So many businesses we work with and see trying to work their way up the ladder put all their attention on incorporation, leaving out a huge step – official governing documents that define each partner’s rules of engagement. Getting this all in writing can protect your business down the line.
What are governing documents?
Your governing documents should clearly define the roles and powers of every partner involved in the business. You may have some partners who are heavily involved in the day-to-day operations while others work merely in a background role. Define these through clear language by defining specific rules of engagement in every role.
Essentially, these rules will be your go-to if there’s a dispute down the line that questions someone’s role and abilities in the company. For the remainder of this article, we’re going to explore this through the example of a company where a partner is attempting to enter into a binding contract with a vendor while another partner is trying to stop them, claiming they don’t have the authority to do enter the company into contracts. You can avoid litigation in this scenario by referencing the governing documents for clarity on each partner’s role.
What happens if you don’t have governing documents?
The absence of governing documents could put your entire operation at risk. At that point, you’re relying on either an oral agreement (which we’ll get into below) or the habits and practices of the company over time. If your business hasn’t been around very long then there may not be many practices to point to as evidence of who has authority.
In the above example, if one partner is disputing another partner’s authority and there are no governing documents then things get trickier. It’s likely the partners will have to litigate the issue short of a mutual agreement to remedy the dispute.
Can I have oral rules of engagement?
If you enter into litigation and there are no governing documents then evidentiary hearings will be necessary to establish proof. Both partners would need to provide any supporting documentation or actions. In this case, the court will need to determine if a previous oral agreement or implied agreement will suffice.
For example, if the partner who is attempting to sign the contract has consistently been permitted to sign contracts in the past then it’s likely the courts will side in their favor as their authority has been implied through those actions. However, if the other partner can show that this would be the very first contract the other partner is signing over a long period of time then no authority has been established.
The oral/implied agreement can stand based on previous communications and actions. This is less than ideal as it can cost serious time, money, and morale for the company, however.
Is it too late to create governing documents?
You might be reading this and realizing your company doesn’t have governing documents, but that’s okay! There’s always time as long as you aren’t already in the midst of a dispute or litigation.
You can create these at any point during the life of your company, and you can update them as the business changes. These agreements can be put together and altered as long as all partners with authority to do so are involved.These documents should never be taken for granted, though. Your business will be best served by a thorough operating agreement that doesn’t have any loopholes or language that won’t stand in court. That’s where we come in. At Pence Law Firm, we help businesses of all sizes make sure their governing documents are thorough and reflect the goals of your hard work. Contact our team and we’ll help you protect what you’ve grown.