The six main reasons your company needs articles of association
Although California does not require a company to have articles of incorporation, below are six reasons why every business owner should invest in a strategically thought-out set of articles of incorporation for their company:
1. The articles of association are the legal basis of the company.
A company’s articles of association provide the framework for how it operates, including rules for the relationship between owners.
2. What if your company does not have articles of association?
If your company does not have articles of incorporation, California law will control how the company is run. It is much better for owners to determine how they would like the company to operate than to rely on state statutes.
It is like a person who has no will or trust. If they die, state statutes determine how the individual’s assets are distributed. Instead, the individual must carefully consider how they would like their assets to be distributed and create the legal mechanism to carry out their plan.
Likewise, it is much better for business owners to strategically consider how they would like their company to operate than to rely on state statutes that are not always the best fit for the company.
3. The charter gives owners peace of mind.
Every company eventually faces challenges. It is better to consider some of the potential turning points in your company and state in the charter how you would like the outcomes of these situations to be determined than to wait to make these difficult decisions when stakeholders and passions can create the perfect storm for litigation.
For example, what if there is a lawsuit between the owners? Do you want the company to be saddled with the expense and distraction of litigation, or would you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants out of the company?
The statute allows for calm and objective reflection on these issues before they arise. It makes more sense to answer these types of questions up front and determine what the best solutions might be for your company than to rely on the default rules of state law or try to resolve them when it’s more common sense is unlikely to prevail.
4. Bylaws help protect your company’s limited liability protection.
One of the main reasons to form a corporation is to potentially have personal limited liability from potential business debts and judgments against your company.
If a company does not have articles of incorporation and is sued, a plaintiff may attempt to “pierce the corporate veil” by arguing that the company should not be afforded the shield of limited liability protection because its owners failed to comply with corporate formalities.
When determining whether to pierce the corporate veil, the court will evaluate a number of factors to determine whether your company is legitimate, including whether you have the correct corporate documents and records. By not having a statute, a business owner risks not being afforded limited liability protection if sued.
5. The articles of association help to avoid misunderstandings between the owners.
Communication and clear expectations are key to any successful relationship, including that between business owners. The articles of association clearly define how the company will be run, which can be critical in preventing misunderstandings about how the owners expect the company to be run.
6. You may need a charter to set up a bank account and get loans and insurance.
Finally, if you want to open a business account or apply for loans, most banks will require you to provide a copy of your articles of incorporation. In addition, insurance companies may require you to provide a copy of your company’s articles of incorporation before providing certain types of policies.
As a business owner, it’s often tempting to cut corners to cut costs. A strategically considered set of bylaws should not be one of those angles. Instead, bylaws should be recognized for what they are—one of the wisest investments a business owner can make to ensure the long-term performance of their company.
Disclaimer: This post discusses general legal issues but does not constitute legal advice in any way. No reader should act or refrain from acting on the basis of the information presented herein without seeking the advice of an attorney in the appropriate jurisdiction. Doug Band expressly disclaims any responsibility for any action taken or not taken based on the content of this publication.
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