When a Small Business Becomes a Multi-Owner Enterprise

The importance of having living operating documents 

The importance of having living operating documents is not only relevant to how the enterprise is governed on a day-to-day basis, but also to how third parties, who may be interested in investing in the enterprise, or purchasing its assets, may view the viability of the enterprise.

The operating documents, including corresponding resolutions, which would be disclosed as part of any due diligence effort, can be revealing to third parties interested in understanding what decisions have been made, how well the company has been managed, and whether there might be problems in regards to having the prospective transaction approved by the ownership.

Poorly drafted, outdated, documentation may suggest that owners have been engaged in questionable conductvis a visthe enterprise or one another, or constitute evidence of a lack of attention to detail that could mean that the enterprise is exposed to, as yet, unidentified risks.

The Takeaway:

The first step to implementing good practices in Corporate Governance is to consider the enterprise’s operating documents, i.e. its Operating Agreement, if the enterprise is a limited liability company, or its Shareholders Agreement, if the enterprise is a corporation.

Good Corporate Governance practice includes that such documents should be regularly reviewed and updated and that changes be reflected in written resolutions acceded to by the ownership.

[1]The use of the term “living” here is a reference to the idea promoted by the historian, Charles Beard, that the U.S. Constitution should be considered a “living” document, meaning that it should evolve as circumstances change.

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