Whether your business is a corporation, a limited liability company, or some other entity type, it is critical that your business has an internal governance document, typically in the form of either corporate bylaws or an operating agreement. An internal governance document that is customized to your business is important for the following reasons:
Proof of Authority
An internal governance document establishes who has the authority to perform certain actions within your company. Drafting a customized internal governance document allows the business owner or owners to think through numerous issues, including the type of authority that others in the company, such as managers, should have. Without a written document stating who has the authority to perform certain tasks, you run the risk of employees taking actions for the company without permission to do so.
Legitimacy with Third Parties
A customized internal governance document is evidence that your company is a bona fide entity that exists separately from the individual owner or owners of the company. This is not only important for purposes of liability protection as discussed below, but also because it tends to make the business owner more legitimate when dealing with third parties, such as banks, vendors, and clients.
For example, to obtain a small business loan, banks and other lending institutions often ask the business owner to see an internal governance document, such as corporate bylaws or an operating agreement, as proof that the business legally exists.
The owners of a business often get along with each other, but there are instances where disputes arise. A customized governance document that the owners helped draft can be helpful in resolving these disputes. These documents address how major decisions within your company are made, and should also set forth different remedies and resolutions for when owners disagree on those major decisions.
Finally, and most importantly, a customized internal governance document helps protect the business owner if your company is sued. If your company is sued and there is ultimately a monetary judgment against your company, the prevailing party may try to recover money from both your company’s assets and your personal assets as the owner of the company.
However, because a customized governance document is proof that the business is a separate entity with separate assets from the business owner’s personal assets, it is unlikely that they could take any of your personal assets. Without customized corporate bylaws or an operating agreement for your company, your personal assets are at a higher risk.