The Two Most Important Documents to a Startup
This is part of Providence Law's ongoing series of legal articles devoted to startup businesses. This series will also serve as a reference for those businesses already operational, so as to ensure all proper formalities have been met.
Every business startup begins with an idea. Properly incorporating the business begins with two different documents. The two different documents are the charter documents and the management agreement. Each is unique and serves an entirely different purpose. This article clarifies each respective document's role and illustrates their individual importance.
The charter documents are like a light switch, serving to activate the business (effectively turning the business “on”). The charter documents are filed with the Secretary of State and are a matter of public record. These documents provide the requisite information for the Secretary of State so that the state is apprised of the business's name, registered agent, and so on. The charter documents also serve to put the third party public on notice that the business exists.
The management agreement is a critical document governing the business. Such documents include operating agreements and bylaws. The management agreement is not filed with the Secretary of State and is not a matter of public record. The management agreement is held internally within the company.
While the management agreement is not filed with the Secretary of State, it is a document of the utmost importance. The business is governed by the management agreement; it prescribes the terms of operation. Important managerial elements are dictated by the terms of this instrument, including how to raise additional capital, voting, and selling one's respective owners. If a properly drafted management agreement is not in place, and contention arises between the owners, then the default terms – supplied by the state of North Carolina- will serve to govern the business. This is analogous to an individual passing without a Will; in the event, no Will is left the (intestate) estate is disposed of via the State's rules and not those of the individual. In the event of a managerial dispute, the management documents serve as a resolution.
Skill is required to properly draft a management agreement reflecting the unique and individual terms of the owners. Generic templates are inadequate and replete of ambiguity. Ambiguity in a contract means uncertainty over contractual terms and such breeds litigation. Legal tip: ambiguity is construed against the drafter – so be advised when employing a generic management template that you could be liable for its lack of clarity!
Thus, the two different business startup documents – the charter documents and the management agreement- are each equally important and both vital to the business. Only one is filed with the State, yet both serve critical functions and are necessary.