Recently I’ve heard three “horror” stories I want to share with you.
For Richer Or Poorer
The first came from a friend who is a divorce attorney. A couple was in the process of getting divorced and the wife was making a substantial claim against her soon-to-be ex-husband’s business. She testified that she had helped come up with the business concept, been integral in its early start-up phase, performed work on its behalf throughout the years, and therefore she should be considered a 50% owner. Obviously, her husband had a very different story. In the end, the court believed the wife in absence of any documentation to the contrary in the business.
The Prodigal Son Returns … For The Money
The second came from an estate attorney. Her client inherited a substantial estate that included a family business. The client’s brother was the black sheep of the family. While he had been involved in the business at the start, he had a falling out with the dad, left the state and hadn’t been a part of the family (or business) for over twenty years. When the father died, he left everything to his daughter. The son didn’t contest the will. Instead, he challenged the ownership documents of the business. Since they had never been updated from his early involvement, he was still the 50% owner. Dad’s will didn’t matter because he couldn’t give away what he didn’t own.
Friends Until The Bitter End
The final came from a new client of mine. He went into business with a partner and they had a falling out. For several years now the business has limped along, with no real direction, because they can’t agree on any major decision and neither wants to give up his position. Since there was no shareholder agreement put in place that dealt with a deadlock possibility, this situation will most likely end in an administrative dissolution of the company. Everyone loses.
What do all three horror stories have in common? They all could have been prevented with simple paperwork.
Isn’t that incredible? The thing that so many business owners consider drudgery is, in fact, valuable and vital to their business. Who would have ever guessed?
But life is like that.
In New York State, a corporation is not properly formed until it has filed with the Secretary of State, recorded organizational minutes, elected a board, appointed officers, issued stock and adopted bylaws.
So what paperwork should our three examples have done?
In the first instance, with the husband and wife, they needed to make sure that the corporate formation documents were in proper order. Had they done so there would be evidence as to whether the wife had a corporate title, was on the board, had been issued shares, and more. With 50% of marriages ending in divorce, the married business owner is well served by making sure the corporate paperwork is up-to-date and clear.
With the father and son, a shareholder’s agreement with a vesting schedule for the founder’s stock would have kept him being a 50% absentee owner. With a 100% mortality rate, it is important that business owners plan for the inevitable and understand who gets what when that happens.
And, finally, with the two co-founders, an operating agreement that specified what to do in case of deadlock would have solved their issue as well. With 80% of business partnerships ending acrimoniously (higher even than the divorce rate!) it’s even more important to have a business pre-nup in place!
Remember, it’s your company. Keep it that way.
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PS - You must keep records that allow you to prepare complete and accurate tax returns for your business. You must also keep documents, such as canceled checks, receipts, cash register tapes, purchase orders, and other sales records to support your business records. Generally, you must keep records and supporting documents for at least three years after you file a return. Oh, no! You’re not sure where your records are, if they’re accurate, or if they’re up to date? Not to worry, we can help you get your records in order too.