What is a "Major" Purchase?

'Major Purchases' may be a relative term, but documenting them can be crucial for your business:

• What constitutes a "major purchase" for a company?

A major purchase generally depends on the size and scope of the business.  For larger companies a major purchase might be a property/building, new vehicle, or expensive equipment.  For smaller companies a major purchase could be anything over a few hundred dollars such as a new laptop computer or printer.  It is also a good idea to document travel expenses such as air fares, hotel accommodations, etc.

•  Why is it important that companies document decisions around a "major purchase"?

Proper documentation of major purchases is essential in creating a paper trail substantiating the financial decisions of the officers.  By formally documenting these actions and decisions, the business owner is taking the necessary steps to perform corporate formalities (the actions that demonstrate personal and corporate separateness).

• What kind of documentation is recommended before/during a major purchase?

It is important to document the date of purchase, the cost of the purchase, and a description of the purchase.  Copies of purchases agreements, settlement statements, loan/lease agreements should be attached to the formal resolutions as exhibits that are referenced in the resolution.

• What are the ramifications of NOT documenting 'Major Purchases'? 

         The biggest issues that I have seen involving insufficient documentation of major purchases has been  regarding inadequate business valuations because the value of equipment and other assets could not be  verified.  This has also caused problems with insufficient insurance coverage or the failure to pay claims  because the business owner could not substantiate the purchase.  This also raises red flags in regards to comingling of funds.  It is a very common practice for business owners to pay for “personal expenses” utilizing company funds.  When major purchases are properly documented, it eliminates any ambiguity surrounding comingling of funds.