Corporate Governance Principles and Procedures

The decision to raise capital, how much, what type, and so on, is made by
the directors, managers, or partners of a business. Recent high-profile scandals
involving a few public corporations highlight the need for responsible
corporate governance at all levels.

Clear-cut corporate procedures and responsibilities will not only keep your new company out of trouble, but will also prove to be an attractive asset to investors when you are looking
for capital.

Most corporate governance statutes are directed to corporations, but that
does not mean that limited liability companies (LLCs) and partnerships
should discount the importance of creating policies and procedures for running
their companies. Sound corporate governance applies to all forms of
business. Much of the law regarding corporate governance is decided in the
courts, and in particular, the courts of the state of Delaware.

There are a number of issues that are common to all business entities.
There are also those that specifically relate to corporations and LLCs. For
corporate governance purposes, partnerships are a close cousin to LLCs, and
they can generally adopt policies and procedures similar to that of an LLC.

Corporate governance, at its essence, is the establishment and practice of
rules and procedures that regulate the affairs of the body corporate. The
corporation’s bylaws contain the basic rules of corporate governance for
a corporation. In the case of an LLC, those rules are contained in the
operating agreement, and in the case of a limited partnership, in the limited
partnership agreement.

The legal standard applied to directors’ actions to
determine whether they discharged their duty of care and loyalty is the
business judgment rule. The standard applicable to LLCs and LPs may be a
higher standard, rising to that of the special care required of a fiduciary
because of the substantial control exercised by the managing member and
general partners over their members.

Registered Agents

All companies are required to have a registered agent. A registered agent is
authorized to accept service of process for the business, and is the designated
point of contact with the state for service of process and correspondence
from the state.

The registered agent could be an individual or a company, but they must reside in the state where the business is registered and have a valid street address (not a post office box). In new companies, the registered agent is usually a principal of the company, but there are also
companies that will serve as your registered agent for a fee.

QUICK TipUse a Corporate Service Company: Eventually, you should use a corporate
service company as your registered agent to avoid any slip-up in receiving
written communications.

The company must notify the state if they change registered agents or if
their registered agent changes addresses. After all, the state needs to know
how to contact your company. The state sends correspondence to the registered
agent, such as the annual report, that must be completed and
returned. 

The requirement to file is not waived because the mail was mislaid,
forwarded to the wrong address, or not mailed by the state. Therefore,
it is in the best interest of the company that the registered agent’s information
is correct and up to date, and that the company stays informed as to
when filings are due. 

Not filing required paperwork with the state is the
most common reason young companies find themselves in hot water.

Initial Reports

Many states require an initial report to be filed with the state within thirty
to ninety days of the formation of a company. These reports are mailed to
the registered agent and generally require a listing of the officers and directors
of a corporation or the manager(s) of an LLC. Failure to file this report
can result in termination of the corporate charter.

Annual Reports

A large majority of states require corporations (and about half of the states
require LLCs) to make an annual filing with an agency in their state of
formation and any other state in which they are qualified to do business.
These reports are mailed to the registered agent, and generally require a
representative of the company to provide an updated list of officers, directors
(managers for an LLC), and resident agents. Failure to file these annual
reports can result in termination of the corporate charter.

Money and Accounting

As part of their duty of care, the officers and directors of a corporation and
the managers of an LLC are responsible for making sure that the company
has sound accounting practices. 

This includes accounting for all assets that
were transferred by the founders into the company and properly recording
the income and expenses attributed to the company. The company’s
accountant should, at a minimum, produce annual financial statements for
the company, and these statements should be made available to the shareholders
and members.

Never combine or commingle personal funds or expenditures with those
of the company. This problem tends to come up with start-up businesses
when funds get low. Separating the company’s bank account from your personal
bank account allows for ease in record keeping and bookkeeping. In
addition, it is advisable to put explanations on company checks, along with
cash tickets and receipts for each transaction. 

Alert!Do not use the company bank account for any personal expenses. 

Establish separate credit card accounts for the company. If you have to,
on occasion, use your personal credit card for a company expense, make a
careful record of the expense and seek reimbursement from the company.
 
Document all expenses and require employees to submit detailed expense
accounts before receiving reimbursement. Manage any petty cash accounts
by requiring written receipts for all withdrawals of cash.

With the help of your accountant, establish a system of checks and balances
to ensure the integrity of your accounting practices. For example, in
some companies, the person who records expenses and the person who
writes the checks for the expenses are separate individuals. In addition, you
may want to require two signatures on checks over a certain amount.

Signing Documents

When signing invoices, receipts, contracts, or other documents on behalf of
the company, always put the corporate name, followed by the individual’s
name and title. Note the following examples.

ABC, Inc.                                 ABC, LLC
By: ___________________     By: ___________________
Jane Doe, President                  Jane Doe, Manager


By this practice, public notice is given that the named individual is
signing on behalf of the company and not in their individual capacity. If the
person simply signed their name, the signor may be held personally liable
for a company debt.

Bank Accounts

In order to open a bank account for your new company, you will minimally
need to obtain a federal tax ID number for your company (a single member
LLC without employees may use the owner’s Social Security number).
This number is obtained by filing a Form SS-4, which can be done online at
www.irs.gov or by completing and mailing the form to the IRS. 

The bank

will also require a corporate resolution, which is a standardized form normally
provided by your bank. If you are an LLC, the bank may want to see
a copy of your operating agreement, and if you are incorporated in another
state, the bank will want to see evidence that you have qualified your foreign
corporation or LLC in the state.

When establishing the company bank account, it is also a good idea to
restrict who can sign checks for the company, and to require two signatures
for checks above a certain amount. This way, you can control who has access
to the bank account and maintain accountability for company funds.

Corporate Governance for Corporations

Corporations are entities that are created under state law. There are no federal
corporations. As such, state laws control most aspects of how a corporation
is governed, including provisions for the bylaws, requirements for
directors and management, share certificates, required meetings, voting procedures,
and so on.

Corporate Records

State corporate statutes allow shareholders access to corporate records unless
there is a justifiable reason not to do so. Therefore, it is advisable to keep adequate
books and records, including your bylaws, minutes, shareholder ledger,
licenses, permits, and copies of significant contracts, in a centralized location.

QUICK Tip
Obtain a Corporate Book to Organize Your Records: This is a three-ring binder
with tabs for organizing your articles of incorporation and any amendments,
your bylaws and any amendments, your shareholder and director meeting minutes,
your share certificates and shareholder ledger, and a tab for forms,
licenses, and permits.

An accurate record of the shareholders of the corporation should include
the name and address of each shareholder and number of shares held. You
should also keep track of the date he or she became a shareholder and the
certificate number he or she was issued.

Keep your corporate seal in your corporate book. This is the seal that you
will use to emboss all corporate records. The seal should state the name of the
company, as well as the state and year of incorporation. Keep your corporate
book in a safe place, usually under the care of the secretary of the company. 

Bylaws

The bylaws are the governing document of a corporation that set forth
the duties and responsibilities of the officers and directors. They also
establish orderly procedures for conducting business. The bylaws are considered
to be a contract among the shareholders, directors, and officers,
and typically contain the provisions regarding shareholders’ rights, directors’
duties, and the affairs of the corporation. 

The bylaws should specify the necessity of holding annual meetings of
the shareholders and directors, and detail the procedures for notifying these
individuals of these meetings. The bylaws will also define what constitutes
a voting majority and a quorum for the purposes of the corporation. The
procedures for calling special meetings are usually described, as well as the
standard order of business of any meeting. 

The bylaws are also the place where the specific duties of the officers of the corporation are described. While many of these terms could be otherwise stated in the articles of
incorporation, it is usually easier to adopt them as bylaws. Since bylaws are
initially adopted by the directors as their internal operating procedure, the
directors may generally propose changes to the bylaws at any time. 

Most bylaws provide that the directors can amend the bylaws but the shareholders
can override the directors’ amendments. Neither the bylaws nor any
amendments to them are filed with the secretary of state.
 
If a corporation functions without bylaws, the articles of incorporation
and state corporation statutes will regulate the affairs of the corporation.
Since amendments to the articles of incorporation are a more cumbersome
and costly way to add governance provisions, it is advisable for a corporation
to adopt bylaws as a way of maintaining some flexibility in the functions
of the corporation. 

Officers and Directors

Policy decisions are made in a corporation by the board of directors and carried
out by the officers. Directors create the policies of the corporation and
officers implement those policies. Operational decisions are usually made
by the officers. Directors generally delegate certain duties to the officers
who are, in turn, answerable to the board of directors for their actions. 

Directors are elected by the shareholders of the corporation, and officers are
appointed by the directors. Therefore, the shareholders may remove a director
and the directors may remove an officer.

Typically, an initial director is appointed in the articles of incorporation
or appointed by the incorporator and then an initial board of directors is
appointed at the initial meeting of the directors. 

It is prudent to designate an uneven number of directors so that the board is not ever stymied by a
tied vote. Also, it is wise to stagger the terms of service of the directors so
that elections of directors never result in a new, inexperienced board. 

This also helps maintain continuity. The directors, in turn, appoint the officers of the corporation, who serve at the pleasure of the board unless they are given employment contracts
that specify the terms under which they can be terminated. It may be
unwise to place officers of the company on the board of directors, as this
can thwart frank discussions and can alter the true, independent nature of
the board.

BOARD OF DIRECTOR’S POWERS
The board of directors is usually granted powers by state statute and
through the bylaws of the company. Those powers will typically include
the power to:
• select and remove all the officers, agents, and employees of the corporation.
This will include the power to:

• prescribe such powers and duties for the officers, agents, and employees not inconsistent with the law, the articles of incorporation, or the bylaws. 
•  fix compensation for the officers, agents, and employees; and,
• require security for faithful service from the officers, agents, and employees;
• conduct, manage, and control the affairs and business of the corporation;
• make sure that rules and regulations are not inconsistent with the law, the articles of incorporation, or the bylaws;
•  change the principal office of the corporation from one location to
  another;
• designate any place for the holding of any shareholders’ meeting or
  meetings;
•  adopt, make, and use a corporate seal;
• prescribe the forms of certificates of stock;
• alter the form of the corporate seal and of certificates of stock from time
  to time, as in their judgment they may deem best, provided such seal
  and such certificates shall at all times comply with the provisions of law.
•  authorize the issue of shares of stock of the corporation from time to
  time, upon such terms and for such consideration as may be lawful;
• borrow money and incur indebtedness for the purposes of the corporation;
  and,
• cause to be executed and delivered therefore, in the corporate name,
  promissory notes, bonds, debentures, deeds of trust, mortgages,
  pledges, hypothecations, or other evidences of debt and securities.

Duties of the President. 

The president shall have general supervision, direction, and control of the business and officers of the corporation.The president shall preside at all meetings of the shareholders, and
in the absence of the chairman of the board (or if there is none), at all
meetings of the board of directors.

The president shall be ex officio a member of all the standing committees, including the executive committee (if any), and shall have the general powers and duties of management
usually vested in the office of president of a corporation. The president
shall have such other powers and duties as may be prescribed by
the board of directors or the bylaws.

Bifurcation of President and Chief Executive Officer. 

If the board of directors creates the office of chief executive officer as a separate
office from president, the chief executive officer shall have the power and
duty to act as the chief executive officer of the corporation. Subject to the
control of the board of directors, the chief executive officer may also have
general supervision, direction, and control of the corporation and its business,
affairs, property, officers, agents, and employees.

If there is a chief executive officer, the president shall be the chief operating officer of the corporation with responsibility for the operation of the business of the corporation
in the ordinary course and shall be subject to the general supervision,
direction, and control of the chief executive officer unless the board of
directors provides otherwise.

In case of the absence, disability, or death of
the chief executive officer, if there is one, the president shall exercise all the
powers and perform all the duties of the chief executive officer.

Duties of Vice President. 

In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the board of
directors, or if not ranked, the vice president designated by the board of
directors, shall perform all the duties of the president. When so acting, the
vice president shall have all the powers of, and be subject to all the restrictions
upon, the president.

The vice presidents shall have such other powers
and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors or the bylaws.

Duties of the Chief Financial Officer. 

The chief financial officer (who also may be called the treasurer) shall keep and maintain adequate and correct accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, surplus, and shares. The books of account shall at all reasonable times
be open to inspection by any director.

The chief financial officer shall deposit all moneys and other valuables in the name of the corporation with such depositories as may be designated by the board of directors. He or she shall
disburse the funds of the corporation as may be ordered by the board of directors.

The chief financial officer shall render to the president and directors,
whenever they request it, an account of all of his or her transactions as chief
financial officer and of the financial condition of the corporation.

Duties of Secretary. 

The secretary shall keep the minutes of the board
of directors. The secretary shall also keep the minutes of the meetings of
stockholders. He or she shall attend to the giving and serving of all notices
of the company, shall have charge of the books and papers of the corporation,
and shall make such reports and perform such other duties as are incidental
to their office and as the board of directors may direct. The secretary shall be responsible for supplying to the resident agent or principal office

any and all amendments to the corporation’s articles of incorporation and
any and all amendments or changes to the bylaws of the corporation. The
secretary will also maintain and supply to the resident agent or principal
office a current statement setting forth the name of the custodian of the
stock ledger, or duplicate stock ledger and the present and complete post
office address, including street number, if any, where such stock ledger or
duplicate stock ledger specified in the section is kept.

Required Meetings

Shareholders and directors are required to conduct annual meetings. The
minutes of the meetings must be included within the corporate records.
Most states allow the annual meetings to be held at a designated time and
place, either within or without of the state’s boundaries.

Minutes of Meetings

The minutes of a corporation’s meetings should provide the complete
record of corporate actions by the board of directors and document the
legitimate exercise of responsible corporate governance by the directors.
In small corporations, it is too easy to make important decisions during
the day over the telephone, during coffee breaks, or on the golf course.
All major decisions should be made by the board of directors and
included in written minutes.

QUICK TipRule No. 1: Put it in writing should be the adage for a corporation to live by.

Even if you feel that you are too busy managing the corporation to attend
to the detail of the corporate minutes, you need to realize that accurate,
written reports of your corporate proceedings may be your only defense if
the corporation runs into trouble.

Without accurate minutes, a judge or the IRS may disavow many of the corporation’s actions, including executive compensation and bonuses, retirement plans, and dividend disbursements. 
The minutes of any meeting should show that the meeting was properly
called and that everyone there received adequate notice as required by the
corporate bylaws. If a written notice of the meeting was sent out, a copy
should be included. 

If no notice was given, the appropriate waiver of notice
should accompany the minutes. The minutes should be signed by all
attending, indicating agreement that the minutes accurately reflect what
took place in the meeting.

For every action that is taken during a meeting, the minutes should show
that the matter was properly introduced, seconded, discussed, and agreed to
by a voting majority as defined in the bylaws. The complete text of any
resolution, contract, report, or other document adopted or ratified in a
meeting should also appear in the minutes.

There is no standard format for minutes, but items such as the time,
date, and place of the meeting, along with a list of all attending, should
be included. All actions by the board of directors should be recorded.
Although minutes should be specific, they need not record every word of
debate on every subject. They should concentrate on final decisions
rather than discussion.

Shareholder Meetings

State corporation statutes require that a corporation hold at least one
shareholder meeting per year. This is called an annual meeting. Meetings
that are held between annual meetings are called special meetings.
 
Special meetings may be required to vote on an impending merger or
amendment to the articles that cannot wait for the annual meeting and
the like. Any business requiring shareholder approval may be addressed
at any shareholders’ meeting.

The main topic of business at an annual meeting of shareholders is the
election of directors to serve for the upcoming year. In addition, shareholders
should adopt a resolution endorsing actions taken by the board
of directors during the past year. All resolutions adopted by the shareholders
should be recorded in the minutes, along with other documents
that relate to the resolution. 

Most state corporation statutes also allow shareholders to adopt resolutions
without a meeting. Actions taken by shareholders without a meeting must be authorized in writing by shareholders holding a majority of the voting
power and filed in the corporate minute book.

Shareholders may attend the meeting in person or vote by proxy. In most
corporations, shareholders vote based on one vote per one share of common
stock. Generally, common stock is voting stock and preferred stock does not
vote. Certain classes of preferred stock may have voting rights for designated
purposes.

A proxy is an authorization to another person, usually the
president or chairman of the board, to vote your stock in a particular manner.
Proxies are normally given in those cases in which a shareholder cannot
attend an annual or special meeting. Proxies can be revoked at any time by
a shareholder. For example, a shareholder could appear at a meeting, revoke
his or her proxy, and vote his or her own shares.

The bylaws may prescribe the time for the annual meeting or allow the
board to set it. A written notice of the meeting should be sent to all eligible
shareholders within the period required by the bylaws.

The notice of the meeting should be accompanied by a proxy statement explaining the matters
to be voted on and provide sufficient information to allow a shareholder
to make an informed choice. Private companies are not required to
file their proxy statements with federal or state regulators.

Make the Most of Meetings: In addition to
conducting the business of the meeting, an annual meeting
of shareholders is an ideal opportunity to highlight the
accomplishments for the company for the year and to outline
the plans for the forthcoming year.

Steps to Take Before an Annual Shareholder Meeting
To ensure all of the legal requirements are met for the annual shareholder
meeting, several things must be done prior to the meeting date.
Send the Annual Report to the Shareholders. 

In a small company, this may simply be financial statements that detail the profits and
losses (income statement), and assets and liabilities (balance sheet) of thcorporation. The accuracy of all financial documents should be attested to by either the treasurer or company accountant. This step may not be required for a small company that has no shareholders outside of the family,
but it is always a good idea to provide this information annually to the
shareholders anyway. 

(It also keeps the family happy and lets them know
that you are not squandering the family inheritance.)

Update the List of Shareholders. 

 If there have been any changes or transfers of stock, make sure the corporate books reflect the current shareholders. When there are many shareholders, this list is required to verify
voting eligibility of those attending the meetings. The secretary usually
greets the shareholders at the meeting and confirms they are eligible to vote
and attend the meeting.

Notify Shareholders. 

Shareholders must be notified in writing of any
meetings—typically no less than ten days or more than sixty days before the
meeting is held. This notification must include the purpose for the meeting,
as well as the time and place where it is to be held.

Issue a Proxy Statement. 

When the notifications are sent out, it is a good idea to include proxy statements that will allow shareholders who cannot attend the meeting to participate by designating someone else to
cast their votes for them. The proxy statement should explain the matters
to be voted upon and provide sufficient information to allow a shareholder
to make an informed choice.

Have an Agenda. 

Regardless of the number of items to be discussed and the number of shareholders or directors of the corporation, it is a good idea to put an agenda together. An agenda informs everyone involved of the
topics of discussion for the meeting and keeps the meeting on purpose.

Appoint a Chairperson for the Meeting. 

The president usually acts as the chairperson at all meetings of the shareholders, and in the
absence of the chairman of the board (or if there is none), at all meetings of
the board of directors. You should also appoint a parliamentarian at all
meetings. 

Someone who is familiar with parliamentary procedure and can
be called upon if a question arises about how the meeting is being conducted or the proper requirements for ratifying a corporate decision. The
secretary of the company sometimes fills this role.

Prepare Yourself to Answer Questions. 

Small corporations will usually be able to anticipate controversial topics, but larger corporations
can be blindsided by shareholders who may be unknown to any of the
officers and directors. When a large number of shareholders are anticipated
to be present at the meeting, it is a good idea to arrange for your
attorneys and accountants to be at the meeting with any documentation
they may need to consult for reference. This material is likely to include
all corporate records, contracts, leases, and tax data. 

Steps to Take After an Annual Shareholder Meeting

Once the meeting has been properly conducted, there are still a few follow
up items that must be done.
Write and Distribute the Meeting’s Minutes. File the minutes of
the meeting with your corporate records. The minutes should contain accurate
and specific records about all decisions made during the meeting, and
should be attested to by those attending.

Follow Up on All Approved Actions. Some actions taken in a
meeting, such as the adoption of an amendment to the articles of incorporation,
may not take effect until the documents are filed with the secretary
of state.

Board of Director’s Meetings

State corporation statutes require that a corporation hold at least one
board of director’s meeting per year. This is called an annual meeting.
Meetings that are held between annual meetings are called special meetings.
Any business requiring board of director approval may be addressed
at any board meeting.

The primary purpose of a board of directors meeting
is to make the decisions that have been delegated to the directors by the
shareholders, such as the election of officers to run the day-to-day operations
of the company.

It is not always convenient for the directors to get together for meetings.
Most state corporate statutes allow for directors to meet by telephone, in
which case, written minutes should accompany the decisions of the meeting
and be signed at a later date or by fax. This provision should be added
into the bylaws.

Most state corporate statues also allow corporations to adopt resolutions
without a meeting by unanimous written consent signed by all directors.
Unanimous written consent is a term used for a process that allows directors
or shareholders to act without a meeting if they each give their consent
to specific corporate actions in writing. The consent must be unanimous for
the resolutions to be properly adopted.

Resolutions

A resolution is a formal action of the directors (or in some cases, shareholders)
authorizing a particular act, transaction, or officer appointment.
Resolutions should be included as part of the minutes of the directors or
shareholders meetings.

It is also wise to keep a catalog of resolutions that have been adopted by the
board of directors and shareholders so that they can be retrieved quickly in the
future. Keeping a cross-reference by the type of resolution and the date that it
was made will help to maintain consistency in decision-making and enable the
board to review prior actions quickly. It can become an arduous task to have
to sort through all of the past minutes to determine a prior action by the board.

QUICK TipA Typical Form for Resolutions: RESOLVED, that the Bylaws attached hereto as Exhibit A be, and they hereby are, adopted as the Bylaws of and for the Company; and FURTHER RESOLVED, that the Secretary of the Company be, and he/she hereby is, authorized and directed to execute a Certificate of Secretary regarding the adoption of the Bylaws, to insert the Bylaws in the Company’s Minute Book and to see that a copy of the Bylaws is kept at the Company’s principal office, as required by law. Initial Issuance of Stock Founders’ common stock should be issued by the corporation to the founders as soon after incorporation as possible and should be so stated in the minutes. If the founders of the company wait to issue their initial stock, you could incur unfavorable tax consequences. For example, if you failed to issue stock to yourself as founder and the company sells shares at a $1.00 per share, the stock you subsequently receive should be valued at $1.00 per share.You could have taxable income upon receipt unless you paid cash for the shares or transferred property of equal value to the company in return for the shares. Corporate Governance for Limited Liability Companies Like corporations, limited liability companies (LLCs) are creations of the state. In contrast to a corporation, an LLC has a great amount of flexibility in how it is governed and operates. That said, if you hope to attract capital, it would be wise to follow a few suggested guidelines. Some LLCs are run very informally and some are operated like a corporation.

Operating Agreement

The governing document of an LLC is called an operating agreement. Many
states require an LLC to have an operating agreement, and in any event, an
operating agreement is highly recommended if there are two or more members
of an LLC. It can eliminate misunderstandings among the owners.
The operating agreement will define the following:
• the different classes of ownership, if any, and the capital contributions
of each member;
• how the profits and losses of the company will be allocated among the
members;
• how the company will be managed and how decisions will be made;
• the indemnification and limitation of liability for members and managers;
• how new members are admitted to the company;
• the rights and duties of members;
• whether meetings are required and how voting is to take place;
• how membership units may be transferred and how a member may
withdraw from the company;
• under what conditions the company may be dissolved and the procedures
for winding up the operations of the company;
• how the operating agreement may be amended; and,
• rules regarding partnership taxation.
The operating agreement is a private document among the members
of the LLC. It is not filed with the state. Each member of the LLC should
sign the operating agreement since it represents, in essence, a contract
among the members.
Members of an LLC are normally entitled to vote on enumerated matters
in the operating agreement, and the operating agreement may be amended
as provided in its provisions.

Managers

Decisions in an LLC can be made by the members, one or more managers,
or a board of managers, which can operate much like the board of directors
of a corporation. If an LLC is run by the members, they typically vote according to each member’s percentage interest in the company. Meetings are held regularly and everyone participates in the decision-making process. At some point, this system can become cumbersome, especially if there are
a lot of members.

If the decisions are left to a manager or board of managers, members of
the LLC typically do not participate in all of the decision-making processes.
Managers operate the company and the members take on a more passive
role. This system is typically used when the members are investors and do
not wish to take an active role in the operation of the company.

A manager does not have to be a member of the company, but often will
hold some percentage of the membership. A manager of an LLC does not
have unlimited personal liability like the general partner of a limited partnership,
and a manager, or for that matter any member, can be another
entity, like another LLC or corporation.

Officers

An LLC can have officers much like a corporation. If there are officers, they
would typically be appointed by the managers or designated in the operating
agreement and they would be responsible for the day-to-day operations of
the company. The managers would then take on a role similar to the board
of directors of a corporation overseeing the activities of the officers and
answering to the members.

Meetings

While most states do not require LLCs to hold meetings of their members, an
LLC should hold a meeting of the members at least once a year. Just like a
shareholders’ meeting of a corporation, an annual meeting of the members is
a great opportunity to discuss the past years’ events of the company and ratify
the decisions of the managers. In addition, the operating agreement can
provide that a percentage of the members can call a meeting at any time.

Sale or Issuance of Membership Units

Unlike the articles of incorporation of a corporation, the articles of organization
of an LLC do not define its total authorized capital structure, and
many times, neither does the operating agreement. If an LLC is looking to raise capital, however, it is advantageous to come up with a capital structure
and define it in the operating agreement.

Here is a suggestion. Define three classes of membership units: A, B, and
C. Class A membership units are reserved for issuance to the founding
members of the company. Class B membership units are reserved for
issuance to managers, officers, and consultants as performance incentives,
just like stock options are used in a corporation. Class C membership units
are reserved for sale to investors.

Later on, the LLC can create and define more classes of membership
units, if needed to raise additional capital. The advantage in defining different
classes of membership is that an LLC has the ability to allocate the net
profits of the company among the classes differently. For example, unequal
portions of the net profits for a period of time could be allotted to investors
and founders.

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