Why you need to regularly review your business records: Part one

Originally Published In The Nashville Business Journal

Running a business or a fast-paced corporate department can be a roller coaster, and keeping your business records organized and tidy likely does not sit at the top of your priority list. Believe me, I understand. As a small business owner and attorney, I would much rather spend my time driving our firm’s growth or working with my clients.

But the fact is, keeping up with your essential business records is critical, and if you set aside time once or twice a year to ensure everything is up to date, you can avoid vast headaches down the road. Here’s a list of some common paperwork categories that require your attention at regular intervals.

Corporate/LLC organization

While this is an area where businesses tend to file and forget, it is essential to take the ongoing steps required after you set up your business entity. Also, if you do business in foreign jurisdictions, there are additional requirements, so it’s key to stay current on these rules. Here are some questions to ask yourself periodically:

• Have you set eyes on your operating agreement (or charter and bylaws) lately? Are they in the minute book? Or stored with your other corporate records?

• Speaking of minutes, are you keeping minutes of the appropriate meetings, including shareholder/member and director meetings?

• Have you filed the annual report with your state?

• Has the company received consideration of each share of stock issued?

Alter ego/Piercing the corporate veil

This category can be a sensitive topic for business owners. Many do not realize the repercussions of comingling company funds and diverting assets for personal use, and it’s important to look at this annually and consider each transaction.

• Are you maintaining minutes and records of ownership and transfer?

• Are you diverting company assets to the detriment of creditors?

• Are you failing to maintain arm’s length relationships between related entities?

• Are you treating multiple entities as one?

While most business owners keep a watchful eye on cash flow and bank balances, there are other financial areas that are often overlooked. I often see clients in a cash crunch scramble to pull together these documents if they need to apply for a line of credit at the last minute or are asked to provide financials for an office lease.

Keep the items listed below handy and you’ll be much nimbler when managing the potential financial swings of business.

• What are your financial obligations to lenders? Do you have the documentation readily available? This includes payment terms, interest rates and balance.

• Is management aware of the representations and warranties as well as the scope of any restrictive covenants? Are there any issues? What are the consequences of a breach?

• Are all assets of the company pledged as collateral? Are there duplicate pledges? If so, is there a subordination agreement? (Basically, this is asking if everything is transparent to the lenders.)

Real property

Real property is defined as any sort of land or structure that is permanently attached to the land, such as a commercial office building or a warehouse space that houses products. If your business owns or leases real property, you should also assess the following items.

• Are there any restrictive covenants or lease obligations that we should be concerned about?

• Are there restrictions on encumbrances that need to be reviewed to ensure conformity?

• Do we maintain the required insurance and are providing certificates of insurance in a timely manner?

While most business owners keep a watchful eye on cash flow and bank balances, there are other financial areas that are often overlooked. I often see clients in a cash crunch scramble to pull together these documents if they need to apply for a line of credit at the last minute or are asked to provide financials for an office lease.

Keep the items listed below handy and you’ll be much nimbler when managing the potential financial swings of business.

• What are your financial obligations to lenders? Do you have the documentation readily available? This includes payment terms, interest rates and balance.

• Is management aware of the representations and warranties as well as the scope of any restrictive covenants? Are there any issues? What are the consequences of a breach?

• Are all assets of the company pledged as collateral? Are there duplicate pledges? If so, is there a subordination agreement? (Basically, this is asking if everything is transparent to the lenders.)

Final thoughts

My challenge to you is to knock out this checklist now, before next month, when I’ll discuss the categories of IP protections, employment, key client or vendor agreements and succession and exit strategy planning in part two of this series.

While it may seem like a huge, mundane task right now, especially if you have never done this before, it gets easier every time, and the short-term pain is more than worth the long-term gain.