Starting your own company sounds exciting, right? Even more so when you are about to create one with a friend or two. However, it can be hard to stride in complete agreement with each other when moving forward with your company. Luckily, this is where company statutes come in.
If you’re not exactly sure what company statutes are and how they function, that’s okay. In this article, we will explain what they are and why your company should have them.
What are Company Statutes?
In short, company statutes are the modus operandi of a company. They work under official, legal terms and form the basis for regulating the who, what, when, where, and why of your company.
Typically, company statutes consist of agreed-upon guidelines made by the founders in the company’s infancy. This way, determining who has what responsibilities, each person’s time involvement, and so on, is done in a time of friendly cooperation, so to say. So, if you want to avoid messy intracompany disagreements, a statute is essential.
Why are Company Statutes Important?
Company statutes are the baseline for making arrangements within a company. They regulate the rules and responsibilities of each founder. These regulations cover anything from how many shares of the company each founder owns to who handles marketing versus financing and operations to seemingly simpler items, such as how much holiday time is taken.
Remember, as with life, company dynamics are not static. This means it’s very possible the vision each founder has for the company will change. In other cases, some may lose motivation over time. As such, an unfair workload distribution results.
Whatever the cause, if the founders of a company find it impossible to agree, statutes provide a way to get back to pre-arranged agreements. This is because statutes give a process for times of deadlock to reach a solution. Without company statutes, it is difficult to maintain the function and operation of a company when disagreements arise.
When is it the Right Time to Make a Company Statute?
It is critical to write a statute as soon as more than one founder gets involved in developing a company. While talking about legalities may sound harsh when brought up in some of the first talks, it is essential to communicate about such guidelines. Especially since the chances of attracting investors for your company without a statute is basically zero. After all, it is difficult to resolve a dispute in a company. If a company is merely threatened by disagreement, who would risk putting money into that?
What Should be Included in a Statute?
Statutes are basically the constitution of your company. So while it may seem unnecessary, you should think as thoroughly as possible about anything and everything you need and want to be regulated within your company. To get started, the following should definitely be included:
- Name of the company
- Purpose of the company
- Address of the head office
- Which people and institutions compose the company and their individual responsibilities (i.e. who is responsible for marketing, operations, finances, supply management, etc.)
- With who you trust company taxes
- Which bank the company will use
- How to change the rules of your company
Though, this list is just the foundation for what you can add. It is also common to address the following in a statute:
- How to approach tax matters
- Defining working time (i.e. when and for how long)
- Settling shares
- How can ownership change
- Process of allowing others to join the company
- Time-off (i.e. sabbatical, holiday, maternity leave, sickness)
- How to regulate the rights for trademark and IP
Again, this list is not exhaustive and there are many more factors that can be contributed. There are professional services that can you help cover more aspects and areas of concern. If seeking professional services is not the right choice for you now, then you can request a basic statute outline from any tax advisor as a good baseline. Keep in mind that every country varies to some extent when it comes to drafting and formalising statutes. Thus, it’s best to also research the details of your home country.
What Happens if a Statute is Not Made?
Without a company statute, there is no baseline for mutual agreement. Sure enough, conflict will arise and form a situation where no decision can be made. Processes such as buying essential equipment, even if cheap, may not even be able to go through. It will hinder growth chances and make it impossible to reinvest in the company’s potential.
No matter how mundane the decision, be it simply deciding to brand your company as one for luxury versus social initiative, it will be difficult. In many scenarios, a lawyer or multiple will be hired and large amounts of money spend to simply agree on the process of your company. This is not ideal considering this could be time and money well spent on growing the company instead
How to Avoid Conflict in Your Company
Now that you see how conflict can be resolved through statutes, it’s important to understand how to even avoid such conflict in the first place. This not only maintains a happier and healthier relationship among founders but encourages productive progress for the company.
Many seasoned founders recommend meeting quarterly with your board of directors or group of founders to discuss company ideology and progress. During these meetings, it is key to speak openly and directly. More importantly, you should all agree on the purpose of the company and how to address its needs within a changing market.
Additionally, don’t hide anything from those you are working with! It will come up one way or another, and it doesn’t do your company any favours if there’s a general sense of distrust.
If open and direct communication fails, finding a mediator is a good solution to preventing conflict. A mediator could be friends or family, but is also often a tax advisor. In other cases, lawyers aren’t just for settling things in the court. Instead, they too can serve as a guide for discussion.
Every relationship will have its ups and downs – company founders are no exception, regardless of how close of friends they may be. To avoid disagreement, company statutes provide solutions for complications that may or may not exist yet within the running of a company. Without them, you will not be able to speak on a legal basis regarding your company, thus rendering it non-functional.
In short, every company should write and agree to the conditions of a statute if it wants to grow well beyond the start-up stage.