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Business Formation

What is Corporate Governance?

How do I keep my business in good standing?

Deborah Sweeney, CEO of MyCorporation


Corporate governance by definition is the system of rules, practices, and processes by which a corporation or LLC is directed and controlled. Corporations and Limited Liability Companies are governed very differently. In fact, corporate governance has a reputation of being laden down by rules and restrictions, and corporate directors are thought to have to really work to keep the business in good standing with the state.

Limited liability companies, on the other hand, are seen as being a lot easier to run - in fact, one of the main factors fueling the structure's popularity seems to be how few governance requirements an LLC's managing members have to deal with. However the truth is a bit more nuanced, and corporate governance may not be as difficult as people have been led to believe.

Corporate Governance

Google 'corporate governance' and you'll be swamped with results on the different documents you supposedly need to run a corporation. And, if your corporation becomes a multi-national behemoth, you very well may want to draft these documents. Running a small corporation, however, only requires a few, key documents. You are going to need a certificate of incorporation, which will detail basic information on your business, like its address, its name, the name and address of its registered agent, and the corporation's stock information.

Many states have adopted a 'fill-in-the-blank' template that they host on their website, so visit your state's secretary of state or department of corporations and look around. Now, you can add special provisions onto your articles of incorporation if you wish, but at this stage doing that may not be the best idea. Most small businesses do just fine with the minimum requirements.

After you file your articles of incorporation, you will need to hold an initial meeting to elect corporate officers and adopt corporate bylaws - rules adopted and used to define certain functions of the corporation, like what corporate officers do, how meetings are called, and how shares will be issued and transferred. Again, most states have a template that you can use to get started and, as time goes on, you can amend the bylaws as needed.

Corporations are required to have an annual meeting for the directors, and an annual meeting for the shareholders. The director's meeting will be mainly concerned with agreeing on important business decisions and creating a plan to guide the business. The shareholder meeting must be announced in advance, and will be used to update everyone on how the business is doing and, if needed, hold elections. And, for every one of these meetings, someone will need to record the minutes.

That doesn't mean recording every, single detail - only items of substance, like when and where the meeting was, how many people attended, the agenda items, and a breakdown of the votes, should be recorded. Finally, nearly every state requires corporations to file a report, usually on an annual basis, with the same information that was given in the articles of incorporation, and to pay a fee.

Limited Liability Company Governance

The governance requirements placed on limited liability companies are comparatively light. Really, an LLC only needs one, main document - a certificate of organization. LLCs file this certificate with the state when they are formed and, like the articles of incorporation, it has to list some basic information on the LLC; its name, address, registered agent information, purpose for formation, and whether it will be managed by one person, or by multiple people.

LLCs usually also have to file an annual report, which lists the same information. And, really, that's about it, unless you want to have an operating agreement in place.

An operating agreement is not required, but it is highly recommended, especially if the LLC will be run by multiple people. Like corporate bylaws, an operating agreement lists out the rules that direct how the LLC will be run. So the function of the managing members, how meetings will be called, tax and financial provisions, the allocations of profits, and the manner in which an LLC can be dissolved will all be laid out in the operating agreement.

Basically, any governance requirements that you, personally, would like to see applied to your limited liability company will be set by the operating agreement.

After reading the requirements placed on both structures, it may seem as though a limited liability company is much easier to run than a corporation. And, in some cases, it is. But a smaller corporation is actually fairly easy to govern, even with all of the requirements. Most meetings and filings only have to take place on an annual basis, and there is no reason these meetings have to stuffy affairs.

If you just don't want to deal with those requirements, you can file an LLC instead - just make sure you seriously consider drafting an operating agreement, just to codify how the LLC will be run. On occasion a lack of structure can be more infuriating than too much regulation.

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