Every business entity originates as a set of legal agreements—starting in many cases with the articles of organization or articles of incorporation. As businesses begin to grow, their structural “backbone” of legal agreements begins to expand and develop. Well-structured formation, operational, and governance documents anticipate, control, and guide the organization’s future development and growth.
Small business owners are asked for their core legal documents when applying to banks and other lenders for commercial credit facilities. Commercial lenders have also returned to business fundamentals when evaluating potential credit facilities—starting with the basic legal agreements that form and control their borrower entities, and more specifically, the authority of officers, directors, and other agents to obtain loans, and pledge collateral.
The return to business law basics is critically important: recent developments in limited liability company law can in some circumstance allow the managing member of a limited liability company to contract fiduciary duties. This is one acute example of why business owners, lenders and investors must read and understand the core business documents when structuring companies and evaluating deals.
In addition to updating their legal “backbone” agreements, well-managed privately held organizations incorporate sound business law practices into their daily routine, which should emanate from the board’s or management committee’s practices throughout the organization.
Although self-imposing all of Sarbanes-Oxley’s rigors is unlikely, certain practices—such as active adherence to a conflict of interest policies and the use of independent auditors—is a start to building a strong legal business structure. In addition to trust, good legal structures and processes can build future bridges with knowledgeable equity investors.
With assistance in updating the core legal formation, operational, and governance documents and preparations for commercial lenders, growth oriented small business are better prepared to acquire new business opportunities.
Michigan’s small business owners are open—and prepared—for business. When combined with sound coaching and a bench of outside advisors, well-structured core legal documents enable small businesses to attract capital and investors and compete in today’s growing marketplace.