My clients regularly hire me to help to change the ownership of businesses and change business relationships. Unless a client has been through the process before, they can be surprised at the number of documents that are prepared in conjunction with the transaction. There are five documents that are usually a part of the restructure or change of ownership of a business.
First, there is usually one document that explains the entire situation and what the people involved in the business are trying to do. Frequently, this document is a purchase agreement. The document will likely break out into three parts. There is an introduction that identifies the people involved. There is a list of recitals that identifies facts regarding who owns what, who wants to do or change something and usually why the people want the change. The final component is a detailed list of the literal terms upon which the participants agree.
A written purchase agreement is not always necessary for every transaction, particularly if “handshake agreement” already exists. However, in those instances, the purchase agreement is still recommended, so that there is an undisputed writing that “memorializes” all the details.
Second, there is usually a receipt for the money or other items that are changing hands. For real estate, this is a deed. For personal property (anything other than real estate) the receipt is usually a bill of sale. If an item of personal property has a certificate of title (like cars and trucks), the vehicle title can sometimes serve as the only receipt.
Third, the consent to the transaction of any business entity should be in writing. This document is usually either a resolution or ratification. The entity agrees to future actions in a resolution and agrees to past actions in a ratification. Sometimes, the document is both a resolution and ratification.
Because corporations, partnerships and LLCs do not have physical hands and fingers to sign a resolution or ratification, the resolution or ratification usually provides authority for one or more of the entity’s representatives to sign for the entity.
Fourth, if money is borrowed or loaned, the promise to repay the money is explained in its own document. That document is called a promissory note, or in common terms, a note. A promissory note is essentially an I.O.U. that includes details of when the loan is to be repaid and what additional interest, if any, is to also be paid.
Fifth, the operational requirements for affected entities usually needs to be amended or updated as a part of the transaction. For LLCs, this document is an operating agreement. For corporations, this document is a Code of Regulations in Ohio (in most other states, it is called Bylaws).
Most business documents can be signed multiple times so each participant can have an original copy, even though copies are almost always as legally enforceable as originals. Notably, though, each original promissory note has legal significance, so each loan should have only one original promissory note.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.