Case Study: Poor Incorporation Process Blocks Investor
CPA Turns Orange County Client’s Corporate Documents Dream into a Nightmare
A small business owner and his partner want to bring an investor into their corporation.
The investor told them, “Before I invest in your corporation, I need to review all of the corporate documents from when you first formed the company. I need to see all of the corporate minutes that should have been written up every year. Once I’ve had a chance to review all of those documents, I’ll make my investment.”
The problem is that the client had his CPA form the corporation, rather than a lawyer. And the CPA elected not to draft ANY of these documents.
What Does He Do?
My Initial Thought: Easy as Cake
Before the client revealed that his CPA had incorporated his business, I thought the answer to his problem was a piece of cake. I reassured him that it was no problem. All he needed to do was contact the attorney who had formed the corporation, and they would give him a copy of the documents.
I was confident of this, because every attorney does a certain amount of work to make sure all of the formalities of the formation process have been met. This includes drafting the articles of incorporation, the bylaws, minutes of the incorporator, shareholders, board of directors, share ledgers, share certificates, all of these technical documents.
When I suggested he call the attorney, he said, “Well, that’s the problem.”
That’s when he told me the bad news. He’d let his CPA write up the corporate formation documents for him.
The Killer’s in the Shower!
When clients tell me a CPA helped incorporate their business, it’s like watching a horror movie. I want to shout, “The killer’s in the shower,” despite knowing full well the victim already opened the bathroom door.
In this particular instance, the client had even asked his CPA a second time whether he needed any of these documents. He knew something was not right.
The CPA said, “Oh, don’t worry about it. Those documents are just for the internal operation of the company—but otherwise, they’re not important.”
And with that, my client opened the bathroom door.
Losing Investors Makes You Scream
Okay, so in this case, the problem is obviously not a killer. But it still screams potential disaster for a small business. Think about it. These guys need an investment. They can’t get that investment because their potential investor requires all of the corporate formalities to have been met during the operation and the formation of the company. Ahhhhhh!!!!!!!!
Small Business Lawyers Can Help You Outrun the Killer!
We’ll help you outrun the killer, at least a metaphorical killer anyway. This scary problem of faulty formation documents can have a solution!
The solution is that the client is now going to have to take the time and energy to go back and recreate those missing corporate records.
Now, he cannot phony up records. He can’t lie about what actually happened in the life of the corporation. He can’t exaggerate the financial condition of the company.
What he CAN do, is go back and memorialize all of those things that actually did occur in the life of the corporation. Then he can put it together in such a way that all of the documents are complete and will satisfy the scrutiny of an investor.
So the rule here is that when you form a corporation, make certain you have it formed with someone who knows exactly what they’re doing.
If you find yourself in a situation, where perhaps a CPA formed your corporation and/or you formed the corporation yourself, call us.
If for any reason you haven’t completed all of the documentation and you now find yourself in a position where you do need that documentation, we can help!
We’ll go back with you and work to reconstruct the missing records. We can put it together so that it not only looks like a complete corporation, but it IS a complete corporation.
You’ll be able to meet any future scrutiny with confidence in a straightforward business fashion.
With reassurance like ours, why would you ever put yourself in a bathroom with a killer again?
Call us today!