Your Entity’s Governing Documents

Part 4 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Simply put, every company should have an agreed-upon, written set of rules identifying how the company is to be run and by whom. The names for these sets of rules vary depending upon the type of entity you have, e.g. operating agreements, partnership agreements, and shareholder agreements, but they are generally known as the company’s governing documents.

Common issues described and controlled by these governing documents include:

• Ownership structure of the company including the source and amount of owner contributions)
• Capital contributions and division of profits and losses
• Roles and restrictions of the owners in managing the company
• Decision-making process for the company including notice and voting procedures
• How and where the company’s books and records will be kept
• Policy regarding transfer of owner interests
• Dispute resolution
• Wind up and dissolution of the company

Additionally, if certain owners make special agreements with the company, including arrangements for the company to use an owner’s vehicles, tools, or other personal property, the nature and scope of those arrangements should be stated in a written, signed agreement. This helps avoid confusion as to the extent of company assets and observance of corporate formalities.

For obvious reasons, articulating these policies beforehand for a single-member company will have less importance. However, having clear guidelines and rules for multi-member companies before an issue arises is crucial to assuring its continued success and avoiding misunderstandings and disputes among owners.

In light of the above, thoughtful attention should be given to setting up these rules at the formation stage of your company. In doing so, you should consider consulting with an attorney about the nature and scope of agreements which will be appropriate for your specific business venture. Additionally, it may be helpful for you to consult with your accountant.

Please note that simply printing out an agreement from the internet can be risky. First, what may be legal in one state may not be legal in your state.  Second, people often think a longer, more complex agreement is better without consideration of whether it is needed. A lengthy, overly-complicated agreement can be more troubling than helpful. It can lead to governing policies and corporate formalities not being followed.  (This increases the risk that a potential creditor may question if you are abiding by the entity’s corporate formalities). As such, you should thoroughly read and understand any agreement before approving it to govern your company.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate investing and leasing. If you would like assistance drafting, revising, or understanding your entity’s governing documents, one of our experienced real estate attorneys would love to meet with you.

In our next post, we’ll move from formation to operations and begin to cover a number of issues to consider in purchasing and managing real estate. If you would like to go back and read our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Observing Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?

Posted by Attorney Michael J. McKitrick. With over 30 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Most of his clients are in the medical, financial services, and manufacturing sectors.