4 Destructive Results from Failing on Your Corporate Governance
Corporations and limited liability companies must maintain their corporate governance. Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed. Corporate governance for small business corporations refers to the decision-making process by officers and directors. Corporate governance for limited liability companies refers to those designated in the operating agreement as “in-charge” of the general business operations of the LLC. Our Sacramento business lawyers refer to those in control of the decision-making process as managers.
Managers have a tendency to neglect corporate governance issues. Although well-intentioned, managers simply forget about corporate formalities and corporate governance because they’re tasked with many other daily issues. Ignoring corporate governance can result in terrible circumstances for a Sacramento business.
How Ignoring Your Corporate Governance Can Destroy Your Business
(1) Limits Access to New Capital
Businesses seeking additional capital with banks or investors can find themselves in a prolonged application process or even denied because the company lacks evidence of proper management. Failure to maintain regular meeting minutes and updated stock ledgers can demonstrate poor management and an unnecessary risk to financiers.
(2) Reduces Goodwill and Business Value
Goodwill is an intangible asset to the company that raises the value of the business. For example, selling business assets may result in $100,000; however, there is more to the business than just the assets. There are online reviews and public recognition. Goodwill could raise the value of the business significantly and is important during any business valuation. Failure to maintain proper corporate governance could create a negative perception in the community. This would cause goodwill to decrease, which thereby reduces the overall value of the business. Businesses don’t want or need a reputation in the community for being poorly operated and managed.
(3) Personal Liability on Managers
Piercing the corporate veil is the process of a plaintiff litigant going through the corporation and placing personal liability on the owners and managers. Failure to abide by corporate formalities or maintain proper corporate governance could result in personal liability on the managers and those managers could be liable for the company debts. Moreover, there are financial penalties attached to certain corporate formalities. For example, failure to file a timely Statement of Information with the Secretary of Sate could result in a $250 penalty!
(4) Potential Employee Lawsuits
Failure to maintain proper employee handbooks and policies could result in lawsuits from employees. Managers should hold regular trainings for staff and employees because it will reduce potential business confusion and ensure compliance. Training sessions are good general business practices, but, depending on the size of the organization, some training sessions and policies are required by law. A short training session could simultaneously address trade secrets and assist with better overall protection. Employment related lawsuits are costly and it’s important to initiate steps towards better protection.
Sacramento Business Attorney
Trevor Carson is an energetic business attorney. In 2015, he was named by Sacramento Magazine as a top lawyer in Sacramento and was named a Rising Star by Super Lawyers Magazine. Business attorney Trevor Carson focuses on consistency, clarity, precision, and simplicity. Please contact our Sacramento business attorney if you have any questions or want to learn more about the purposes of proper corporate governance. Corporate governance should be regularly addressed and cleaned up. Our business law attorney can assist with updating corporate governance.
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By: Trevor Carson Google+
*There are many purposes to proper corporate governance; however, this article is only briefly listing a few. The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary. This blog article may contain language which could be read as a testimonial or endorsement. That testimonial or endorsement does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter. This blog article is an Advertisement and or Newsletter. Sacramento’s business attorney Trevor Carson discusses proper corporate governance.
Sacramento Business Resources
The California Secretary of State is located at 1500 11th Street, Sacramento California 95814. The California Secretary of State is a government entity where various corporate documents are filed including the Articles of Incorporation and Statement of Information.
The Department of Business Oversight is located at 1515 K Street Suite 200 Sacramento California 95814. The Department of Business Oversight is where business file limited offering exemption notices pursuant to Corporations Code Section 25102(f).