Corporate governance for Limited Liability Companies refers to the system of rules, practices, and processes by which a company is directed and controlled. While the term is more commonly associated with corporations, limited liability companies (LLCs) also have governance structures in place to manage their affairs. However, the governance structure of an LLC differs from that of a corporation due to the flexible nature of LLCs.
While LLCs offer flexibility in structuring their governance, it is crucial for members to carefully craft their operating agreement to avoid misunderstandings and disputes. Seeking legal advice during the drafting process can help ensure that the governance structure aligns with the goals and intentions of the LLC’s members.
In this article I am going to address:
- What is CG and who plays a part in it?
- How it works?
- Why is it relevant to startups and scaleups?
- When does it become relevant?
THE WHAT & THE WHO
Corporate governance is about:
- How does a company function?
- How does it make decisions?
- Who has control over the company?
- Who participates in decision making and in which decisions?
- What can founders do in a company?
- What can directors do? What are their powers?
- What is the relationship between the founders/shareholders and directors and managers?
- What kind of accountability, responsibility, rights and obligations are created in each type of relationship?
- What kind of accountability, responsibility, rights and obligations are created outside of your company, with the society, governmental bodies, industry, etc.?
CG essentially is the way in which a company manages the relationships with and between its shareholders, directors and management, but also other stakeholders in the company, such as employees, auditors, and accountants, customers and suppliers, society, governments and the environment.
In other words, CG is the way in which a company behaves, both internally, and externally. And it is also about accountability, both internally and externally.
There are currently around 24 million companies in the European Union, of which approximately 80% are limited liability companies. Around 98-99% of limited liability companies are small and medium-sized enterprises (SMEs) (source).
Therefore, in this article I will share in general about the rules, practices, and processes by which a company, a limited liability company, is directed and controlled and not specifically about corporations/stock companies, which are differently governed and have special rules in Europe.
CG starts with forming a company, and continues with operating and maintaining it, but also with winding it up.
It starts with your very own company structure. With how you design your share capital structure, whether there are any special voting or decision rights, what do your constitutive documents provide in respect to specific areas, in which you will be defining the operating legal framework of your company. This constitutive part is governed by a series of legal documents that you, as a founder, enter into with your co-founders and shareholders and which govern your relationships in this newly created context.
It continues with all your company policies and procedures where you deal with operating your company in more detail, department by department, business unit by business unit, vertical by vertical, depending on how you choose to organize your operations. Here you would include working staff manuals, internal HR policies and procedures, general and specific company policies and procedures on whistleblowing, commercial practices, anti-bribery, gifting, compliance programs.
According to statutory law requirements under company law, you will need to present and get approval of the business plan and budget, the financial statements of the company, on a yearly basis, present any investment plans, distribution of profits, or where you decided not to distribute, but rather to re-invest, why? This will create a necessary track record of sound decision making, management and governance that your investors will look into in the diligence process, with the aim to understand that there is a long-term strategy and vision.
Finally, maintaining a company means, aside from keeping up-to-date policies and procedures, maintaining a good standing of the company: authorizations, licenses, permits are up-to-date, any special rights or usage rights, you maintain your patents and trademarks in force, but also, you maintain reporting and accountability towards your stakeholders.
WHEN IS CG RELEVANT?
In raising finance for your company, whether you are a startup or scaleup, you will be required to show that you have created and laid the foundation for your corporate governance in a transparent, compliant and operationally viable way, but also that you are maintaining everything up-to-date and that it is not just all on paper, but that you are following your own policies, procedures, programs and enforcing them.
This comes up very early on in the pre-due diligence talks and is effectively scrutinize in the DD.
Post financing, CG becomes an important monitoring, reporting & accountability tool in the relationship with your investors.
If you would like to better understand, gain clarity and plan for your company’s corporate governance or financing round, book a call.