
Hello, Reader,
It’s been quite a journey! If you’ve been following along, on behalf of Touchstone Strategic Law, thank you! And if you’re new to this series, feel free to catch up with Parts 1, 2, and 3.
We’ve offered guidance about leaving your 9-to-5 to creating your business entity and dividing ownership. Now, we’re entering the end of this series with a primer on corporate governance.
Your company has a government that is supposed to represent its best interests, that makes decisions on behalf of the owners, the citizens of your company. You get to set up the government! No need to brush up on John Locke to do it, though. Here are some basic principles.
We’ll approach this through two lenses - for corporations and for limited liability companies (LLCs). Of course, the type of entity you choose will depend on your vision. (We’ve created a space to get free guidance—join us for office hours!)
Governing a Corporation
As the founder of a company, you are the founder of a new, mini society, and you can do this online! Back in the day, you had to sign paper with ink, just like George Washington, and visit the Secretary of State’s (SOS) office in person, or even worse you had to send a fax. Now, forming your corporation is as simple as filing an online application with your state of choice.
The Sole Incorporator
Once your corporation is formed, there is one person in charge, known as the Sole Incorporator. They’re the one sim in a blank world you just created. Sounds heavy, but it’s just the person who signed the form to create the corporation. That’s probably you, but it could be someone at your lawyer’s office or at another service provider that formed the corporation for you. For a brief moment, this person is ruler of their new world.
The Board
But heavy is the head that wears the crown. The Sole Incorporator will quickly (hopefully) transfer control to the Board of Directors, through a document called the Action of Sole Incorporator. In this document, you’ll appoint all the Directors who will serve as fiduciaries of the corporation, kind of like legal guardians of the baby society you just created. The Sole Incorporator is often also on the Board.
The Board makes many decisions on behalf of the corporation—opening bank accounts, accepting investors, hiring major talent, and approving key agreements with other entities. It’s your society’s first congress. Quickly though, the Board delegates these tasks to others to handle everyday business. That first act of delegation is to appoint officers.
Officers of the Corporation
This is where titles come into play (hello, Mr., Dr., or Prof. Patrick!). The essential officer roles in a corporation, for legal purposes, are President, Secretary, and Treasurer. One person can hold multiple roles. The President, in terms of authority, is equivalent to what we think of as the CEO.
C-suite officers are also often appointed early in the life of a corporation. These are titles more often used on business cards, email signatures, and when otherwise relating to the rest of the company and the outside world. The offices above are necessary for legal corporate governance purposes, however.
Now you’ve set up the government of your mini-society. At the beginning, the branches of your government – the Board members and the officers – are often one and the same.
The Shareholders
In this metaphor the shareholders are the citizens, the voters. While shareholders are often seen as passive investors, they ultimately call the shots. They hold the power to elect the Board of Directors, who hold the power to appoint the officers, who hold the power to run the company. Behind all that are the shareholders.
Not all corporate citizens are necessarily equal. Corporations often have different classes of shareholders:
Common Shareholders: Common stockholders typically have 1 vote per share. What you see is what you have.
Preferred Shareholders: Preferred shareholders have bought extra rights with the strategically important funding they provided. They may have extra voting rights per share or a veto on major decisions (along with enjoying priority in receiving dividends and claims on assets).
Governing an LLC
Let’s touch briefly on LLCs and governance. The incorporation process for an LLC isn’t much different from a Corporation. You’ll need to visit the SOS website and select the correct form. (Pro tip: These forms may look straightforward, but always triple-check them before submission!)
LLCs tend to be flatter, as in less hierarchical, than corporations. An LLC is often seen as a relationship of equals. However, it’s essential to clearly define each member’s roles and responsibilities to ensure you stay on track toward your shared goals.
For instance, one partner might oversee day-to-day operations as a managing partner, while another focuses on long-term strategy or funding. These roles can evolve as the business grows, but documenting them early on in an Operating Agreement is crucial. This document serves as the LLC’s rulebook, detailing ownership percentages, profit-sharing arrangements, and processes for decision-making or resolving disputes.
LLCs, however, are extremely flexible in terms of structure. You can build up the governance roles just about any way you like. Eventually an LLC can have enough layers of responsibility and authority that it looks more like a corporation. The difference in entity type becomes more important for tax consequences than governance.
That’s all for now! Stay tuned for the next post in this series, which will be about early hires and the various legal approaches one can take.
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