Often clients will come to me and they either set up their entity on their own or had someone else help them with it. Often important documents are omitted and coming soon (January 2024) are IRS reporting requirements that must be made to the Federal Government on each already created or each newly created entity.
Too often, all they have are the bare legal documents that are required by the Texas Secretary of State and because their bank didn’t require more to set up their bank account, they think they are done. However, one of the most important but often forgotten documents involved in an entity are the Bylaws or Company Agreement.
What are Bylaws and why do I need them?
Bylaws are the written ‘Rules and Regulations” set up for a corporation. It sets forth powers for the officers and directors, establishes fiscal authority and sets up rules for adding or removing stockholders. It is important to set this up for your business so that you have the authority clearly outlined – even if you are the only officer, director and shareholder. Often banks will require the Bylaws to be updated and clear prior to issuing a business loan – this is especially true with SBA loans. With a multiple shareholders, it is like a contract among all the parties that reminds them of their duties, what money(s) they can remove from the business and ensures that in the event of a departure, that the procedures are spelled out. Bylaws serve also as a deterrent to litigation because the expectations of the parties have been set forth and reduced to writing.
What is a Company Agreement or Operating Agreement and why do I need one?
A Company Agreement/Operating Agreement are the same thing as the Bylaws only they set forth the procedures and authorities for the Managers and the Members of an LLC. This is also usually required by Banks when issuing a commercial loan and also helpful in multiple owner situations. It is best to be prepared in case you do need one – instead of realizing too late that you should have prepared it.
Upcoming Reporting Requirements.
Coming soon are new reporting requirements to report the ownership interests of both already created entities and newly formed entities. The already created entities have a longer time period to begin reporting, but the new entities must start their reporting in January 2024. While information is still being released on the new requirements, apparently, the failure to timely report this information can possibly result in prison time or fines in excess of $10,000.00.
