A Legal Maintenance Routine For Your Closely Held Business

Many homeowners keep a checklist of regular maintenance procedures to keep their houses and equipment operating properly, for example, change the furnace filters, clean the spouting and so on. A closely held business should also establish a routine of periodic reviews and other legal "maintenance" procedures to make sure that it continues to optimally operate. The following can serve as a general checklist for such a review.

1. Format for conducting business: Is your current form of business the most advantageous for you? Consider the legal and tax aspects of the following types of businesses: proprietorship, partnership, C or S corporation and the latest form—limited liability company (LLC). A great deal of new businesses are being formed as LLCs, a type that did not exist just a few years ago.

2. Continuation of status: Make sure you are in compliance with all applicable laws as to the payment of franchise and other fees and taxes, as well as filings with state and federal regulatory agencies (OSHA, EPA and so on).

3. Sales of securities: Before selling or otherwise transferring any company stock, warrants, membership interests, notes or other securities, be sure to establish available statutory exemptions from state and federal securities regulations, if any, or make all necessary registrations with state and federal securities agencies. The company stock or membership records should accurately reflect all transfers.

4. Dividends and distributions: The company's governing board (directors for corporations and managers for LLCs) should expressly declare and document any dividends or distributions to be made to shareholders or members.

5. Annual meetings: State statutes generally call for annual meetings of shareholders and directors of a corporation. You corporation's regulations or bylaws probably establish a designated date for such meetings. An LLC's operating agreement may also require annual meetings of its members and managers. Arrange for proper notice of the meetings or for a waiver. Hold such meetings, and take all regularly required actions (election of directors, appointment of officers and so on). Complete and sign minutes of meetings or take actions by unanimous written consent.

6. Special meetings: Arrange for proper notice of special meetings or for a written waiver. Complete and sign the minutes of special meetings of the governing board or owners, or take such actions by unanimous written consent.

7. Transactions not in the ordinary course of business: Transactions not in the ordinary course of business should be approved in advance or ratified by the governing board (and in some cases, by the owners) at a special meeting or by unanimous written consent.

8. Compensation of officers: Compensation of officers should be reviewed and approved by the governing board or owners on a regular basis (at least annually). Owners of the company who are also employees should be wary of IRS challenges to unreasonable compensation.

9. Employee benefits: Employee benefits should be regularly reviewed as to costs and benefits, as well as their compliance with changing laws: Changes to employee benefits (and annual pension or profit sharing plan contributions, if any) should be approved by the governing board: Owners who are also employees should be especially alert to potential IRS challenges to benefits.

10. Authority of officers and execution of documents: Clearly define the authority of officers and provide appropriate limits on that authority. Make sure all officers show their proper titles when executing contracts or other documents (including correspondence) on behalf of the company. Make sure the company's name is properly stated on all documents, including business cards, stationery and so on.

11. Financial authority of employees: Consider the banding of employees who handle company funds. Review checksigning, withdrawal and loan authority of employees with financial institutions.

12. Business licenses: Periodically review federal, state and local license requirements unique to your business and the company's compliance with such requirements.

13. Qualification to do business in foreign states: Most states require each company that is "doing business" within their boundaries to register in their state, and penalties may arise from failure to so qualify. This goes beyond the obligation to collect and pay state sales taxes or employee state tax withholdings. Consider the need for qualification in foreign states and register if necessary.

14. Continuity of business operations: Consider purchasing or review key life, disability and business interruption insurance coverages. Consider buysell arrangements between the owners and the company in order to provide a market for the stock of a deceased or disabled owner and continuity of management. Consider the company valuation technique used for such a buysell. If the buysell is funded by insurance, confirm that the coverage is adequate for the company's current valuation.

15. Indemnification of officers and directors/managers: Review corporate regulations as to indemnification requirements. Review liability insurance coverages, including coverage for errors and omissions of the officers and directors/managers.

16. Intellectual Property: Take all the necessary steps to protect the patents, trademarks, copyrights and other "intellectual property" of the business. Timely file patent applications and renewals for qualifying inventions. Protect written, visual and audio information by copyright. Register trade names and trademarks used by the company and for its products and/or services. Consider confidentiality policies for employees and other business contacts.

17. Litigation: Review the status of all pending litigation and strategies for reducing future claims. Review the procedures used within the business for the handling of court papers (summons, subpoenas, and so on) received by the business. Verify that the name and address of the statutory agent on file with the Secretary of State are still valid.

18. Insurance: Review the coverage amounts, deductibles and terms of your public liability and other insurance to make sure that they are still appropriate.

19. Advisors: Updating your attorney, accountant and other professional advisors on the status of the business and the strategic issues it faces will allow them to more knowledgeably advise you and to proactively suggest actions you may wish to consider to better achieve the company's goals. Public corporations, sole proprietorships or partnerships may have other special review needs. Actual legal requirements may vary from state to state and you should consult with your attorneys and other advisors to develop your own list of periodic legal maintenance procedures for your business.

Reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.