Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. While often associated with large public corporations, governance is equally important for private companies, where the absence of public scrutiny makes internal controls all the more critical.
Why Corporate Governance Matters
Good governance serves three functions: liability protection (preserving the corporate veil), dispute prevention (clear rules for decision-making), and value enhancement (attractive to investors and acquirers).
The Foundations
Formation Documents
Articles of incorporation or organization, filed with the state, establishing the entity's existence and basic structure.
Governance Documents
Bylaws (corporations) or operating agreements (LLCs) govern internal operations. Shareholder or buy-sell agreements address transfer restrictions and dispute resolution. These should be customized — not copied from templates.
Corporate Records
Maintain minute books, stock ledgers, contracts, financial records, and regulatory filings. Proper records are essential for preserving liability protection.
Fiduciary Duties
Duty of Care
Directors must act with the care of a reasonably prudent person: being informed, attending meetings, reviewing reports, and making informed decisions.
Duty of Loyalty
Directors must act in the company's best interests: avoiding conflicts of interest, no self-dealing, no usurping corporate opportunities, and maintaining confidentiality.
Business Judgment Rule
Courts will not second-guess directors who acted on an informed basis, in good faith, and in the honest belief the action was in the company's best interests.
Board Structure and Function
For private companies, the board typically consists of founders and major investors. Regular board meetings with distributed agenda and materials, detailed minutes, and documented decision bases are essential.
Compliance
Regulatory compliance varies by industry. Annual filings and franchise taxes must be maintained. Every entity must maintain a registered agent in each state of qualification.
Governance for Closely-Held Companies
In closely-held companies, governance is often neglected. This is a mistake — courts are more likely to pierce the corporate veil, disputes among owners are common, and governance documents address succession and transaction readiness.
Common Governance Failures
- No written governance documents
- Outdated documents
- No meeting minutes
- Commingled funds
- Conflicts of interest without disclosure
Frequently Asked Questions
Do we need a board if we're small? Corporations require a board by law. For LLCs, the operating agreement determines management structure.
How often should we update governance documents? Annually, and whenever there is a significant change in the company.
Can we use template governance documents? We strongly advise against it. Templates do not account for your specific needs and may contain unenforceable provisions.
Strengthen Your Governance
Good governance is the foundation of a well-managed, well-protected company. Contact Poulson Law at 607-547-1195.
