Business Entity Governance in The US: An Overview

What this is: Entity governance is the system of rules and processes that guide a company’s direction and control, ensuring accountability, fairness and transparency with all stakeholders.

What this means: This article focuses on routine governance during the lifecycle of a company and the importance of utilising an effective entity management system. 

What is Entity Governance? 

Entity governance is a system of rules, practices and processes by which a company is directed and controlled. This important practice involves balancing the interests of a company’s many stakeholders, such as directors, shareholders, customers, government and the community. The high-level goal of entity governance is to ensure accountability, fairness and transparency in a company’s relationships with all of its stakeholders.

The Benefits of Forming in Delaware 

Delaware sets the standards for corporate governance in the United States with its long history of corporate law jurisprudence and business-friendly laws. Roughly 60% of Fortune 500 companies are incorporated in Delaware. The Delaware Court of Chancery is the hub for corporate governance litigation. For more information regarding the benefits of forming in Delaware, this publication on the Delaware Secretary of State site will answer the question, “Why Delaware?” The publication is available in several languages.

While there are many general areas of corporate governance for business entities (including board and management oversight/executive governance, shareholder/owner rights and engagement, risk management and disclosure, ethical business practices and compliance, data privacy and security, employment and labour laws, ethics and anti-corruption and environmental/social compliance), for the purpose of this article we will focus on routine governance during the lifecycle of a company.

Governance and Compliance During the Entity Lifecycle

The Stages of the Lifecycle of a Business Entity

1. Formation: Qualification where doing business
2. Compliance during the growth phase while doing business and expanding
3. Winding-down phase when the business is no longer active

Why Should Business Entities Maintain Their Legal Existence in the States Where Formed?

Ensuring that business entities maintain their legal existence in the states where formed and qualified/registered to do business is an important element of ongoing governance for the following reasons:

• Mitigates risk
• Litigation, parent liability, tax exposure, reputational risk
• Ensures accuracy of reporting, record keeping and authorised persons authority
• Ensures readiness for due diligence in preparation for growth
• E.g., new financing or M&A deal
• Protects corporate separateness
• I.e., prevents piercing the corporate veil

Initial Organisation Entity Formalities

Once your new entity has been formed, it is very important to ensure that the company complies with the initial organisation requirements in the state in which it was formed. Initial organisational requirements may vary from state to state and may depend on the entity type (i.e., corporation vs. limited liability company).

Below are some of the requirements for a Delaware corporation or limited liability company (LLC):

• Incorporator action (in select states, i.e., Delaware if directors are not included in the Certificate of Incorporation)
• Organisation meetings in person or actions by written consent
• Adoption of bylaws or operating agreement (dependent on entity type)
• Routine approvals (i.e., banking resolutions, etc.)
• Issuance of shares (for corporations)
• Issuance of membership interests (for LLCs under operating agreement)

Ongoing Federal, State and Licensing Reporting and Filings

Monitoring the many requirements and deadlines to maintain legal existence and compliance for a business entity will include federal and state income and state franchise tax requirements, state annual/periodic report filing, licensing (payroll, industry-specific) and other compliance matters (i.e., registering and maintaining trade/assumed names).

The Challenge

The challenge is managing the varied due dates by federal and state agencies, what is required to be included on reports, coordination of report filings, payment of taxes and other fees. It is critical to have good internal controls and to coordinate with your legal, tax and registered agent partners to get support and possible tools to track due dates and coordinate submission of filings and payment of taxes.

It is important to rely on an effective entity management system that can serve as a single source of truth for these compliance deadlines, tracking current management, ownership, managing organisation documents and other things central to business entities.

Best Practice Tips

• Consult with a legal and/or tax advisor early on and during the lifecycle of your business growth. Consider what your business purpose is and the 3 to 5-year plan. This is the best investment you can make!
• Know the terms of your bylaws, operating agreement or other governance documents that outline the relationships, duties and responsibilities of the people who own and manage your company. (I.e., when annual meetings are required, other stated obligations by statute or by terms of the governance documents. Be wary of boilerplate documents that may not support your actual business needs and decisions.)
• Understand and track all compliance obligations. Federal, state, licensing; identify trusted and competent “partners;” outside legal counsel, tax advisors, registered agent.
• Leverage an entity management system. Invest the time and resources to make this a single source of truth for your core formation and qualification governance documents and manage annual and periodic compliance events.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.