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Documenting Transactions

#20 on my formalities checklist is: “Have you documented all major transactions of the company business with resolutions, notes, contracts, etc.?”  This is a logical followup to #14, discussed in Give Managers Their Power.

You need to resolve to keep your corporate shield in place!  Big companies have attorneys on their staff that keep their eye on the corporate shield every day.  You can’t afford that, so what can you do?

You have to actually read the operating agreement (or bylaws in a corporation) to see what the managers have to do, what the shareholders have to approve, what notices need to be given, how the books need to be kept, and all aspect of the care and feeding of your little company.  They will specifically state that actions should be taken only after the members (directors or officers) have given the managers (owners or shareholders) authority.

Once you have duly appointed your managers, they will still need to follow the formality of getting permission from the members for any large purchases or large financial transactions.  It is best to have these authorized in advance, with approval stated both in resolution form and company meeting minutes.

Exactly who needs permission from whom will be laid out in your operating agreement.  It will specifically state that certain actions should be taken only after the managers have been given the authority by the members.  One way to keep this straight is to get out some colored pencils and highlight everything that the owner member needs to do in one color and what responsibilities the manager has in another.  If you are acting as both manager and member, make sure to remember what color “hat” you are wearing when you conduct business for the company according to what you have underlined.

For example, once you have duly appointed your managers, they will still need to follow the formalities of getting permission from the members for any large purchases or large financial transactions.  The operating agreement will say what things the members need to approve.

Once you understand all of the different “moving parts” in your rule book, then make a list of everything the managers do. Make a list of all the member’s responsibilities. Note the dates things have to be done on. Once these lists are assembled, go to your computer.

Each day or at least each week, review the lists. If something has happened that required an action, then make an entry on the computer. If there is something that your operating agreement says has to be done at a specific time (like monthly or yearly), set some calendar reminder to do it, and then log it when it has been done.  Keep a running document that logs every significant event.  For example, if the operating agreement says that the members have to approve the creation of a bank account, and you have opened a bank account that week with the approval of the members (which may be just you), then make an entry on your log:

Members approved establishment of a bank account at Wells Fargo.

Make the entry very brief. No embellishment! If your operating agreement requires approval of the members to fire someone, the entry has to be very simple.

Members approved firing of John Henery.

What you are doing is creating the minutes for your annual or semiannual shareholders’ meeting. Minutes are basically public information. John Henery can get them when he sues you for wrongful dismissal. If your minutes read, “Members approve firing of John Henery, because he is too old,” you just lost your lawsuit.

It will take some time to create your documents and lists, and may go a bit slowly the first few times you make your entries.  However, as you become familiar with the process, time spent on your entries should only take a couple of minutes a week.

When these lists have been built systematically since your last meeting, the minutes for your next meeting are easy.  Just put all the computer entries into a meeting minutes format.  Publish them to any attending the meeting–they can be attached to an email notice for the meeting–and either let people review them beforehand or go over them quickly during the meeting.  Ask for a vote to approve them.  Record the vote in the meeting minutes, referring to the logged minutes, and state that those minutes are approved.  Include a line on the official copy of the logged minutes for the appropriate signatures, proving their approval.  If it is a members’ meeting, then the members in attendance would sign the official copy of the minutes.  Remember, your operating agreement will tell you what business has to be conducted by the members and what has to be done by the managers.

If your rule book (operating agreement) does not outline appropriate duties, then you get the rules addressing that issue as they are established by the State. Lots of the websites and even a lot of attorneys give you about five pages worth of operating agreement. That’s perfectly legal, but they don’t address a lot of issues that I think you should address, so the State’s rules kick in.  You don’t want to be caught missing some duty as manager or member because you didn’t cover it in your operating agreement and didn’t know that the State’s rules dictated you needed to do something else.  Would you rather write your own rules, or would you rather have the State’s rules apply? Your operating agreement or bylaws should be about 20- 30 pages long to address a reasonable number of issues that really need to be addressed.  Check out the Operating Agreement Template I have put together for you.  It’s quite inexpensive for all you get.

Your operating agreement for an LLC or your bylaws for your corporation are the key to the documentation you will need to prove that you are treating your company as a “real company.” If you treat it as a real company, the courts will probably treat it as a real company and use the corporate shield to protect you.

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