Perspectives from ISB

Family owned corporations are subject to the same statutory requirements regarding entity governance as non-family owned businesses. Thus, in order to fully comply with the applicable statute for the state where the business is incorporated, a family business should pay attention to all provisions that require annual or other ongoing action by the company. These include:

  1. Holding annual shareholder meetings
  2. Holding formal elections of directors at shareholder meetings,
  3. Documenting actions taken by the unanimous consent of the directors without a meeting
  4. Maintaining complete records of the company’s operations and finances

Many companies also have detailed provisions in their by-laws that spell out additional duties of directors and officers, along with shareholders’ rights and responsibilities.

Regardless of the clear requirements of the applicable statutes or the by-laws, family owned businesses sometimes take a more relaxed approach to these formalities. This level of informality is usually not a problem for the family members in their day-to-day ownership or operation of the business when there is close contact and communication among the various stakeholders. However, when disputes arise between the owners or management, or when transactions with third parties come into play, the lack of corporate formalities can become an issue.

It is entirely common for third parties dealing with family businesses, such as lenders, investors, or possible merger partners, to require formal documentation of corporate authorization for material decisions and transactions, as well as maintenance of complete and accurate corporate records. In the end, and despite the added paperwork and processes, family businesses would benefit far more from complying with required corporate formalities regarding decision-making and record-keeping than they would from ignoring such requirements on the assumption (often incorrect) that no one will ever make an issue out of the lack of formalities.

Source: Murtha Cullina LLP – Michael P. Connolly, Family Business Perspectives, January 9 2017;