Corporate Governance – Respecting Formalities
Why is This Important?
In our practice we have seen many closely held businesses (including those operating within family limited partnerships set up for estate planning purposes) that have lost sight of the reasons a particular legal form within which to operate was chosen and are deviating from required legal and corporate formalities. When this occurs, owners can face potential loss of tax benefits, personal liability for the debts of the business, loss of money to theft and embezzlement, and a plethora of different legal actions by regulators, the IRS, creditors, and others.
So what are some of the types of formalities than can give rise to undesirable results if not respected?
- Failure to maintain clear separation between personal and business assets and activities resulting in owners' loss of tax or creditor protection benefits. For example, parents who contribute the vast bulk of assets to a partnership or LLC often view and treat the assets as their own and overtime may engage in transactions that do not have a business purpose and/or are not clearly entered in the name of the legal entity.
- Failure to document and communicate (on an on-going basis) to employees and owners the regulatory and tax restrictions that govern a business's operation combined with mistakes in estate planning resulting in loss of S corporation status.
- Failure to institute appropriate financial controls resulting in unauthorized, or surprising transactions, or embezzlement. Because many closely held businesses employ family and friends, there is oftentimes an excess of trust and a deficiency of skepticism in overseeing financial transactions.
- Failure to keep apprised of regulations that govern the business. This can result in fines, penalties, and actions by regulators (including in worst case scenarios, shutting the business down), and lawsuits by employees and third parties.
What is Corporate Governance?
Corporate governance is a decision-making methodology that responds to the needs of all legitimate stakeholders including owners, regulators, taxing authorities and employees. When well done, it addresses accountability and communication at the board or manager as well as employee levels. It addresses all aspects of risk management. It ensures that the business operates in accordance with its governing documents, contractual obligations, and legal and regulatory restraints.
How We Can Help You
Because of our breadth of experience in business law and tax planning, we provide our clients with an integrated approach to designing and reviewing corporate governance practices. For example, we provide:
- Corporate governance checkups that review governing documents, operating contracts, practices and procedures, and regulatory exposures for the purpose of advising of weaknesses and suggesting improvements.
- Revisions to governing documents and policy and procedures manuals so they respond to the current needs of the company and its owners and the legal environment in which it operates.
- Advice on issues when and as needed.
Every business should undergo a governance checkup, especially if one has never been done, in order to ensure the business is not unnecessarily exposed to liability and has not irrevocably deviated from its objectives.