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WE LAW: Corporate governance and management

WE Law is a continuing legal series written exclusively for the Mississippi Business Journal by lawyers of Watkins & Eager PLLC.
CLARK LUKE

CLARK LUKE

Mitt Romney was right. Corporations are “people” – at least in the sense that they have many of the same rights and obligations as individuals. Corporations (and other business entities) can enter into contracts, incur debt, sue and be sued. Business entities cannot, however, act on their own behalf. Determining who has the power and authority to act for and bind a company is of paramount importance.

We previously discussed the various entity choices and tax classifications.  (See “Business Entity Selection: Choose wisely or pay later,” Mississippi Business Journal, July 24, 2015.) A primary reason for utilizing the corporate or limited liability company (“LLC”) form is to shield the owner’s personal assets from the claims of the entity’s creditors.

Respect Corporate Formalities. Under the wrong facts an owner might still be personally liable for the debts of a corporation or an LLC. In Thames & Co. v. Eicher (1979), the Mississippi Supreme Court allowed the “corporate veil” to be pierced because the corporation was no more than the alter ego of its shareholder, who was unable to recall who the directors and stockholders of the corporation were. Further, the Court found that no regular meetings were held and the company kept no minutes pertaining to its operation.  Knowing and respecting the duties and formalities of a company’s governance and management structure is a critical part of maintaining personal liability protection.

Be Mindful of Duty Delegation. In addition, owners should be aware of the powers granted to the company’s management for operational and control purposes. For small companies, as long as the separate roles and functions are understood and respected, it may not matter whether a particular power is reserved for the members, managers or officers.  For companies with several owners and those managed by non-owners, the limits and delegation of powers can be critically important. For example, the members of an LLC may wish to restrict the manager’s ability to make large purchases, borrow funds above a certain amount, pledge assets as collateral, or make distributions. Limitations should be clearly articulated in the company’s governing documents.

Third parties, such as lenders and sizeable vendors, often require some information regarding the company’s structure and authority.  For a lender, this routinely takes the form of an entity certificate containing representations and warranties about the entity, authorized representatives, and an attached resolution authorizing the contract or transaction.

Actual governance and management roles and functions are typically determined by a combination of state law and the entity’s governing documents. We will now review governance and management arrangements for two of the most common Mississippi-formed entities: corporations and LLCs.

Corporations

The Mississippi Business Corporation Act (the “Corporation Act”) provides default rules for corporate governance and management. Under the Corporation Act, a corporation must adopt articles of incorporation and bylaws. In most instances, the articles of incorporation, which are public documents filed with the Secretary of State, will be abbreviated.  The non-public bylaws – rules adopted to regulate the corporation’s business affairs – will usually contain the substantive governance and management provisions.

Unless the shareholders otherwise agree in writing, the Corporation Act requires a board of directors, which is the company’s governing body and is responsible for management. Individual directors usually do not have any authority to bind the corporation. Rather, the board of directors, as a group, must act through minutes at a duly called meeting, or by a properly executed written consent.

Generally, a board of directors focuses on policy issues and the election of officers who are responsible for day-to-day management. Officers derive their authority from a combination of the bylaws, specific grants of authority from the board of directors, custom and usage, and the nature of the company’s business.

LLCs

An LLC is governed by the Revised Mississippi Limited Liability Company Act (the “LLC Act”), which, like the Corporation Act, establishes default rules. The LLC Act vests management of an LLC in its members but allows for management to be ceded to one or more managers who need not be members. The LLC operating agreement is typically the governing document that addresses management and governance issues. The operating agreement may restrict the authority of the individual members to act for the LLC and may also require majority, super-majority, or unanimous consent of all members for significant decisions.

Members may choose for the LLC to be managed by one or more managers and each manager will generally have the authority to bind and act on behalf of the company in the ordinary course of business. Although the managers may run the day-to-day affairs of the LLC, the operating agreement might reserve certain powers to the members. An LLC is also permitted to have officers. If the LLC chooses to have officers, their roles and functions are usually set forth in the operating agreement.

In a typical manager-managed LLC, the members can be roughly compared to the board of directors for a corporation. However, in large or complex LLCs, the members may act in a manner similar to shareholders, and the managers may act in a role similar to the board of directors. In those cases, the managers (who might, for example, be called the “board of managers”), would have oversight over the management and governance of the LLC, including the election of officers to run the day-to-day affairs of the company. One of the advantages of an LLC over a corporation is flexibility in crafting the governance and management structure.

Conclusion

Owners should understand and respect the management and governance structure of a company to protect the personal liability shield. Third-parties should strive to ensure that agreements are executed by persons who have the authority to act for and bind the company.  For owners, optional governance structures are available that will strike a balance between easy of operation, good management practices, and oversight. An attorney can aid in the selection and organization of the right entity

» Clark C. Luke is a tax attorney at Watkins & Eager PLLC.  Clark is a Certified Public Accountant, and earned a Bachelor of Accountancy, Master of Taxation and Juris Doctor from the University of Mississippi, and an LL.M. in Taxation from the University of Florida.  Clark can be contacted at cluke@watkinseager.com .

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