Corporate Formalwear: Maintaining a Well-Dressed Business Entity

June 26, 2009 · Filed Under Business Planning 

Due diligence. What a horrible term. Just mouthing the words brings me back to nightmares of boxes upon boxes of documents, all of which require a thoughtful review and analysis. Business owners don’t often worry about due diligence because they’re not the ones that have to do it (that’s what lawyers and accountants and consultants are for). Even so, due diligence will hit a business owner right where it hurts…in the wallet. Seriously…just look at this very basic due diligence list: http://www.1000ventures.com/venture_financing/due_diligence_checklist_byvpa.html

A business is a living, breathing entity. It has a body (corporate/LLC shell), a mind (owner/senior staff), it eats (sells goods/provides services) and goes to the…well…you get the analogy. And just like a person, a business has a paper trail. Documentation is the only reliable way of knowing what a business has done or will do. And this documentation is the subject of due diligence.

The most basic business formalities are: (1) keeping business and personal finances separate; (2) maintaining an updated, comprehensive document book of business activity; and (3) conducting business in the company’s name.

Due diligence can be the equivalent of running from Freddy Kruger in your dreams, or a leisurely stroll through a park on a nice day. The choice is up to the owner and senior staff; and that choice is whether or not to adhere to business formalities. The more it’s like a Nightmare on Elm Street movie, the more time and money it will cost the business. A poorly documented business will require clean-up before it can undertake many transactions, including: buying or selling the business or its assets; taking on an investor or additional investment; or even providing basic documentation in advance of entering into a lease or opening a bank account.

As I’ll write in the future, maintaining corporate formalities can be cheap and easy. The alternative is expensive and annoying.

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