The basics of corporate structure

Please note that this is a general overview of corporations, what they are, and how they function.  As with most legal questions, there are exceptions and nuances that we will not discuss here.  If you are thinking about forming a corporation it is always advisable to seek the advice of a licensed attorney.

Advantages of Incorporating

Corporations are legal entities designed to pool the efforts, resources, and expertise of many individuals into a collective operation.  And, perhaps more importantly, provide a layer of protection for the shareholders, directors, and officers from the liabilities of the corporation.  This protection is not, however, absolute.  The most notable exception is the legal principle often referred to as “piercing the corporate veil.”  This is a complicated area that is beyond the scope of this article but underscores the notion that the protections offered by the “corporate veil” have their limitations.

Where to Incorporate

Where you chose to incorporate is critically important and must be carefully analyzed.  Corporations are created under and governed by state statutes.  Those rules are further refined by the courts.  Statues and caselaw dictate a variety of critical issues such as whether and to what extent shareholders owe fiduciary duties to one another, what duties directors and officers owe to the corporation and its shareholders, and whether those duties can be eliminated.

The Shareholders

The shareholders are the “owners” of the corporation.  Large, publicly-traded companies might have millions of shareholders and tens of millions of shares outstanding. By contrast, the stock of a closely-held corporations is owned by a few people shareholders.  Most corporations in the United States are closely held corporations with a limited number of shareholders.

A quick word on Shareholders’ Agreements or Buy-Sell Agreements.  It is highly advisable for the corporation’s shareholders to negotiate amongst themselves and execute a Shareholders’ Agreement.  A corporation or other type of entity (like an LLC) can own stock in another corporation.  Shareholders’ Agreements provide the framework for the relationship by and among the shareholders and cover critically important issues like voting, management, money, and exit.  Many statutes will defer to the Shareholders’ Agreement on these critical issues.  The provisions in the statutes are looked to only if there is no Shareholders’ Agreement in place.  Often the statutory provisions will result in unfavorable results, thus emphasizing the need for a Shareholders’ Agreement.

The Board of Directors

Directors are “elected” by the shareholders.  Directors dictate and oversee the corporation’s general objectives; they focus on the “big picture” and provide direction to the officers of the corporation. It is generally advisable to have an odd number of directors to avoid a deadlock situation, which results in no clear majority.

The Officers

Officers are “appointed” by the directors.  Officers are responsible for implementing the corporation’s general objectives and are generally responsible for the day-to-day operations of the corporation. Officers report to the directors, who, in turn, report to the shareholders.  There are certain required positions that must be filled and other optional positions, but these will vary by state and statute.  Most corporations are required to have a President, Treasurer and Secretary.  Other optional positions include Chief Executive Officer (position often held by the President of the corporation), Chief Operating Officer, Chief Financial Officer, Chief Technology Officer, and the ubiquitous position of Vice President.  The number of officers a corporation has can vary widely depending on the size of the Corporation and the specific industry of the corporation.

An individual can hold one or more positions as a shareholder, director and/or officer.

How are New Jersey businesses impacted by the CTA law?

Most New Jersey business owners are probably aware of the Corporate Transparency Act (CTA). This is the law that requires that all owners report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN).

Hypothetically, this law would make it harder to operate anonymous shell companies. Usually, federal reporting was reserved for large corporations, but the CTA impacts smaller companies as well.

Who is considered a beneficial owner?

A beneficial owner is anyone who controls at least 25% of the ownership interests. This can be through direct ownership (a co-owner) or indirect ownership – a contract, arrangement, etc.

There are some exceptions as to who is considered a beneficial owner. This includes minors, employees or creditors.

How do you report this information?

FinCEN collects names, addresses and other identifying information for each company’s beneficial owner that’s reported. This information will need to be updated with FinCEN annually after January 1, 2022.

In addition, business owners will have to report when their company was formed. There is some leniency on reporting all of this information for companies that were formed before CTA was passed, but they still will have to get these reports in within two years of the deadline.

What are the penalties?

Companies that don’t report this information – or report false information – might face fines and penalties. CTA violations may have a penalty of $500 for each day the violation continues or criminal fines up to $10,000.

Business owners can also go to jail for up to two years, depending on the severity of the CTA violation. Unauthorized disclosure of beneficial ownership information is also subject to penalties and imprisonment.

It can be overwhelming to suddenly have to report this information or change how your company is run. It’s important to seek outside help from a lawyer to make sure your company is in the clear and not committing any CTA violations.

What to know about selling your company

Selling your business is a complex and lengthy process that requires careful consideration of many factors. Having a good team of advisors is essential.

The sales process will likely take several months to complete. Ideally, you will start preparing for the sale six to 12 months before you start the sales process. Working with a broker is a good idea if you are unfamiliar with the process and may allow you to complete the transaction in a timely manner and get a fair price for your company.

In addition to working with a broker, you will want to consult with other advisors to help facilitate the sale, such as an attorney, accountant and business appraiser.

Determine why you want to sell

Prior to starting the process of selling your company, you should think about why you want to do so. Typical reasons include a change in circumstances, a desire to retire or disputes among the owners. Having a clear vision as to why you are selling your company will help to focus your decisions and make the process much more efficient.

What are you selling?

Generally, when selling your company, the deal will take the form of an “asset” sale or a “stock” sale. An asset sale involves the sale of the assets of your company (such as machinery, equipment and inventory). Alternatively, in a stock sale you will sell the shares of stock in your corporation or LLC that owns the assets.

There are many differences between an asset sale and a stock sale, so you should seek the advice of a lawyer, as well as an accountant, when considering which would be more suitable for you.

How to prepare the company for sale

Selling a business is like selling a house in that you need it to look its best before going on the open market. This means ensuring that you have streamlined operations, minimized costs and addressed any open legal issues with your company.

The closing process

The “closing” is when ownership of the business is actually transferred. The closing process can become hectic as you near the end of the sale. Having a good team of advisors will ensure a smooth transition.

The closing can happen at the same time as the signing of the contract of sale. You can also choose to have a “dry closing,” where you sign the contract of sale first, then conduct due diligence, arrange for financing and complete the closing process.

Understanding due diligence in M&A transactions

It is not unusual for businesses in New Jersey to be sold, bought or merged with others. When two businesses decide to merge, it is important that the owners do their due diligence and investigate the other company thoroughly. This may help them avoid any potential problems down the road.

What is due diligence?

Due diligence is the process of investigating a potential business transaction thoroughly. This may include looking at the financials, reviewing contracts and talking to employees. In many mergers and acquisitions, due diligence is conducted by both parties before they agree to move forward with the deal.

Why is due diligence important?

Firstly, due diligence may help you avoid many potential issues with the other company. For example, if you are buying a company, you will want to make sure that there are no hidden debts or liabilities that could come back to haunt you later on. Secondly, due diligence can give you a better understanding of the other company and what you’re getting yourself into. This may help you negotiate a better deal or price.

Lastly, in some cases, you may be legally required to conduct due diligence. For example, if you are a public company, the Securities and Exchange Commission has rules that require you to disclose certain information about any potential business transactions per corporate law provisions.

How do you conduct due diligence?

There are many ways to conduct due diligence, but it generally involves doing some research on the other company and talking to employees, customers and other stakeholders. To get started, you can look at the other company’s website, customer reviews and financial reports.

You could even talk to the company’s suppliers to get their perspectives on the company. Your aim is to get as much information about the other company as possible so that you can make an informed decision about whether to proceed with the transaction.

Overall, due diligence is an important part of any M&A transaction. If you are thinking about buying, selling or merging your business, be sure to do your homework first and investigate the other company thoroughly. It could save you a lot of headaches down the road, such as hidden debts or legal problems.