Humans have organized the world through an infinite string of agreements and social contracts. Whether people agree to stop at a red light or get in line at the grocery store, a functioning society depends on these kinds of agreements.
From the beginning, organizations must abide by government policies by registering with the state and obtaining a tax registration ID. Fully understanding the contents of your operating agreement and knowing your organization’s needs can save you many sleepless nights.
Another common mistake includes assuming that all signatures have been collected to make the document legally binding.
As your trusted tax advisor will tell you, different organizations fall under different tax categories and your operating agreement needs to align, accordingly, from the start. Most businesses “set it and forget it” when it comes to their operating agreements. Similarly, changes in IRS tax policy may necessitate changes to your operating agreement.
The second major agreement that organizations must pay significant attention to is the cap table. Since this is a ledger deciphering who owns what and how much, the cap table needs frequent analysis to ensure accuracy. This is because it can impact company valuation, capital raises and even recruiting talented executives.
Many cap tables are created using spreadsheet software. Most cap tables have errors stemming from duplicated files that have been shared among multiple owners. Depending on basic spreadsheet software to account for true ownership when dealing with vested shares, options, dividends, transfers, buybacks and cancellation of vested shares due to employee termination can result in an accounting nightmare. Furthermore, correcting mistakes involves costly attorneys and accountants.
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