Friday, July 11, 2014

Legal Issues You Should Be Aware of as a Diversity Business

When you decide you want to certify or re-certify your diversity business, there are several different factors regarding the legal structure of your business that you'll want to take into consideration. We have focused on four of them.
  1. Keeping your legal records current
  2. Financing and funding from investors
  3. Your operating agreements and by-laws
  4. Keeping the structure of your ownership clear
Let's address these one by one.
Keeping Your Legal Records Current
Many applicants struggle to submit information that accurately reflects changes in their businesses.  
Even if there have not been any ownership or management changes in your business, think about items such as annual minutes, real estate leases or statements of information that many business owners neglect to update on a regular basis.   Remember, any discrepancy in your application for certification or re-certification can be grounds for denial of certification.
Furthermore, it is imperative that:  
  • Meetings with company officers occur as required (by law and/or agreement);
  • Meeting minutes are recorded and organized; and
  • ALL executive decisions and financial transactions are properly recorded and accounted for in a professional manner.
It's much easier to keep track of your records in the moment than it is to re-create them down the line.
Financing, Funding, and Investors
Agreements concerning any type of financing (including but not limited to bank loans, equity investment, and/or private sources) cannot conflict with your certifying organization's eligibility requirements.  The diverse owner must maintain majority (51% or more) ownership, operational and management control, and the company must maintain its independence from any company not eligible for diversity certification.
With private equity agreements, it's very common to have a clause that requires unanimous consent of all the owners to permit the sale or transfer of the company. In addition, bank lines of credit or working capital loans may not be tied and/or granted in the financial merit to a non-diverse owned entity. This common type of clause disqualifies a diverse owned company from obtaining certification or re-certification.
Your Operating Agreements and By-Laws
Operating agreement or by-laws of an incorporated entity are their governing documents.
Many companies run into trouble when decisions or the operation of the company must be made by unanimous vote of a board of directors or the members/shareholders. This type of business governess structure disqualifies a business from becoming diversity certified.
Whoever drafts your governing documents must make sure that these documents are clear about the fact that the diverse owners are the final decision makers. This doesn't mean that non-diverse owners or partners cannot play significant roles in the business, however they cannot have the authority to make final decisions. In fact, if a non-diverse business owner has the highest title in the company, this is enough to disqualify your company from certification.
Keeping the Structure of Your Ownership Clear
More and more businesses are electing to move the ownership of their company into a trust. While this is fantastic for estate and/or business secession planning, it can, and often does, complicate a diversity certification application.
This article is not intended to give legal advice, rather to alert business owners as to the common pit-falls in regards to legal documentation.  Deciding whether or not to move the shares or ownership of your company into a trust is a decision that musts be made with your attorney.  However, the execution of the trust agreement should be made in consultation with an expert and/or attorney that is familiar with the eligibility requirements of the specific certification organization.   
Saving Time and Unnecessary Headaches
Most businesses are not certification experts.  They shouldn't be, it is not their business.  But unfortunately too many wait until it is too late and they find themselves denied certification or even re-certification. At that point they seek the counsel of a lawyer who may charge them many thousands of dollars because the owners are not well informed about what they truly need.
At Certify My Company we consult with business owners to determine the needs of the business.  There will be cases when an attorney is necessary, but often, just having the correct information can save them thousands, if not tens of thousands of dollars.
Legal compliance can be tedious and expensive, but smart, established companies put aside resources to invest in their businesses... in their future.

Heather Cox
Certify My Company has the expertise to help you navigate the waters of diversity certification and related legal issues. We have legal counsel who are specialists in this area and can help you as a small business owner to make the right decisions and ensure that your documents match what the certification application is requesting.

Even if you're an established legal entity, you shouldn't assume that you'll qualify for certification as a diversity business. A disjointed process that is out of sync with the appropriate steps can cause lingering problems.

Call Certify My Company at (973) 272-4159 or email at to schedule a complimentary consultation.

This article is for informational purposes only and not for the purpose of providing specific legal advice.   
Robert Tzall is an attorney in private practice representing small and diverse owned business as well as high net-worth individuals in commercial, regulatory, corporate and real estate matters. He can be reached at   

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