Forming your corporation is the first step to limit your personal liability and to ensure the protection of your personal property. However, we are often asked, “Is forming a corporation sufficient to achieve such protection?” or “Is it sufficient to resolve any issues that may arise between me and my partners down the line?”
The short answer is – NO.
After forming a corporation, there are several considerations that startup founders should take into account to mitigate their risk and to adopt a corporate structure that is in line with their expectations.
The below summary describes the initial documents necessary to ensure your corporation is legally compliant and to create effective asset protection mechanisms. Note: many of these principles can be applied to LLCs as well, but for the purposes of discussion here, we are focusing on corporations.
Director Resolutions are how you make important decisions for your corporation during the meetings of the Board of Directors. The basic initial resolutions include:
- electing Directors and appointing Officers, such as the CEO, CFO, and Secretary;
- approving Bylaws and Shareholders Agreement (discussed next);
- obtaining authorization to open a separate bank account for your startup; and
- issuing shares to shareholders of your corporation, etc.
Following such corporate formalities is essential to prevent your business creditors from reaching your personal assets. In the event of an audit or lawsuit, it provides evidence that you keep your personal and business assets separate, treat your corporation as a distinct entity, and cannot be personally liable for corporate actions.
Bylaws provide a governance structure and procedures for your startup. Adopting Bylaws is mandatory in California and many other states. The Bylaws address the following questions:
- how to manage the corporation, and elect the Directors and the Executives;
- how to make important decisions, such as approving major transactions; or
- how to accept new investments or investors into your business, etc.
Adopting and following your Bylaws regularly is crucial in shielding shareholders’, directors’ and executives’ personal assets from corporate liabilities. This is why you should have well-structured Bylaws for your corporation that is is easy to understand and follow.
A Shareholders Agreement is helpful when your business has more than one founder or new investors join your startup. This Agreement memorializes the understandings and intentions of shareholders and can introduce significant protections for you and your partner(s), such as:
- the right to buy existing shares before non-owners (Right of First Refusal);
- the right to sell your shares back to the corporation (Put Option/Buy Back);
- the right to buy newly issued shares before non-owners (Pre-emption Rights); and
- the right to buy other owners’ shares in case they breach their duties (Buy-Sell Rights).
Having those provisions in place will allow you to tackle finance and governance disputes efficiently without impairing your regular business operations.
At Carbon Law Group we can help you to negotiate, draft, and incorporate these documents into your new business structure. This will shield your personal assets from your business creditors’ claims and will set clear paths for dispute resolution between you and your partners.
If you have any questions about how to draft governance documents for your startup or need assisting with setting up your corporation, do not hesitate to reach out to us. You can use this link to schedule an appointment to speak with an attorney today.
This blog article is published for educational purposes only. Its sole purpose is to give you general understanding of the law and not to provide specific legal advice. By using this website you understand that no attorney client relationship has been established between you and the publisher. Please contact an attorney licensed in your state for competent legal advice.