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 will focus on routine governance during the lifecycle of a company and the importance of utilizing 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 labor 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
- Formation: Qualification where doing business
- Compliance during the growth phase while doing business and expanding
- Winding-down phase when the business is no longer active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 authorized 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 Organization Entity Formalities
Once your new entity has been formed, it is very important to ensure that the company complies with the initial organization requirements in the state in which it was formed. Initial organizational 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)
- Organization 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)
If you’d like to work with a team that can handle your corporate filings, corporate dissolutions and more, head on over to our Corporate Services page.
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 organization 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 and 3 to 5-year plan is... 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.
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Why is it important to manage entity information?
During the stage when a business entity is active and conducting business, it is important that all federal, state and local regulatory, statutory and administrative compliance requirements are met. The consequences of not managing this information in a timely and accurate way can range from payments of penalties and interest for late filings and tax payments to being restricted or delayed from closing on a loan financing. To learn more, read our article, The Advantages of Utilizing a Good Entity Management System.
What is the role of a registered agent in forming and registering a company nationwide?
Generally, the role of the registered agent is to receive any legal process (i.e., summons and complaints, legal notices) and official correspondence from Secretaries of States where your company is registered (i.e., annual report tax notices) and forward these time sensitive documents to the designated contacts at your company. But the registered agent is also another partner on your team and can assist your lawyers and in-house legal and accounting teams with ongoing services even after your company is formed. Read our article, How Do I Form and Register My Company Nationwide?
What happens if I miss the June 1 deadline for paying the annual LLC/partnership tax for Delaware alternative business entities?
Delaware will assess a penalty of $200 for non-payment or late payment, plus interest which will accrue on both the tax and penalty at the rate of 1.5% per month.
Delaware entities that fail to pay their annual taxes for 3 consecutive years will be deemed void on the Secretary of State’s records. However, Delaware statutes allow you to reinstate the entity by filing a Certificate of Reinstatement and paying all past due taxes, penalties and interest. (Your registered agent can assist you with this filing.) Want to learn more? Read our article, FAQs: Annual Franchise Tax Payments for Delaware Alternative Business Entities.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
