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Closely Held Businesses

Organizational Documents, How to Set Your Business up for Success

By June 28, 2017No Comments

If you are thinking of starting a business, or have already begun the process of starting your own business, then you’ve probably thought about how you would like it structured.  But have you thought about what you need in your organizational documents to substantiate your business when it comes down to the legal nitty-gritty of compliance with laws and regulations?

What makes up your organizational documents will differ based on the type of entity your business is. Below are the most common types of entities followed by a list of organizational documents that they require (in the state of California).

Corporation

  1. Articles of Incorporation: Also referred to as a Charter, is a written document filed with the California Secretary of State by the founders of a corporation detailing the major components of a company such as its objectives, its structure, the appointed registered agent and its planned operations. For a company to be legally formed, Articles of Incorporation must be filed.
  2. Bylaws: Corporate bylaws define a corporation’s purpose, how it will operate, and the duties and responsibilities of the people who own and manage it. They also let you specify shareholder ownership rights, establish guidelines for selecting and removing officers and directors, and guidance to plan annual meetings. Although bylaws are not filed with the state nor legally required, it helps show banks, creditors, other third parties and the IRS that your corporation is legitimate.

General Partnership

  1. Partnership Agreement: When two or more people agree to enter into business together to make a profit, a partnership is formed. You do not need to put anything in writing or file any type of notice with the state or local authorities. This is a feature that distinguishes this from other business arrangements. However, it is highly advisable to use a formal, written partnership agreement to spell out how income, deductions, gains, losses, and credits are to be split. Besides the aforementioned items to be included in the partnership agreement, you should also include:
  • Name of the partnership, location, when it was formed and the purpose of the business.
  • Who the partners are and their capital contributions.
  • Rules concerning voting, admitting new partners, and management.
  • The “exit strategy” of your partnership. This section details how to dissolve the partnership – the circumstances under which partners can withdraw, how much notice they must provide, and how the assets will be distributed.
  • The means of dispute resolution.

Limited Partnership

  1. Partnership Agreement: Just like a General Partnership, it is highly advisable to have a formal, written partnership agreement
  2. Certificate of Limited Partnership: Unlike a General Partnership, a Limited Partnership must file Form LP-1 with the California Secretary of State. The Certificate of Limited Partnership requires information about the limited partnership’s name, location, identity of the managing general partner(s), and an agent in California to receive service of processes in case the business entity is sued.

Limited Liability Company

  1. Articles of Organization: The Articles of Organization act as a charter to establish existence of your LLC in your specified state and set forth certain basic information about your new business. It is filed as a single document with the Secretary of State’s office (or similar state agency that handles business registration if not located in California). Once filed and approved by the state, the Articles of Organization legally create the LLC as a registered business entity within the state. The following are items to be included in your Articles of Organization:
  • The LLC’s name and address (principal place of business).
  • The nature of the LLC’s business. This is usually stated in broad language in order to avoid limiting the LLC’s business prospects.
  • Name and address of your LLC’s registered agent.
  • The names of managers and members of the LLC, if known at the time of filing.
  1. Operating Agreement: An operating agreement is an agreement about LLC members governing the LLC’s business, and members’ financial and managerial rights and duties.

Your entity’s organizational documents are comprised of formation documents filed with the California Secretary of State and other internal documents of the entity that govern the rights of its equity holders and the management and operation of an entity. It is important to note that you may have other compliance requirements related to forming an entity, such as obtaining an EIN, filing a S Corporation election, and paying a minimum tax. If you have any questions about what to include in your entity’s organization documents or further compliance requirements in regards to forming your entity please contact your L&B professional at 858-558-9200.

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