For many closely held businesses, “corporate governance” can feel like a concept that applies only to large public companies. However, small and mid-sized companies can benefit from adopting clear governance practices. Whether your business is owned by a single founder, a family, or a small group of owners, formalizing how decisions are made and documented can reduce risk, prevent disputes, and support growth.
What is Corporate Governance in a Closely Held Company?
Corporate governance refers to the framework of rules, practices, and processes by which a business is directed and controlled. For closely held companies, this typically includes:
- Roles and responsibilities of owners, managers, and directors
- Authority for major business actions
- Documentation of important corporate actions
- Oversight of financial and operational matters
Unlike large, public companies, closely held businesses often operate informally. While this flexibility can be an advantage in some aspects, it can also lead to uncertainty and potentially increased legal risk.
Why & When Corporate Governance Matters for Closely Held Companies
Preventing Owner Disputes
Disputes among owners can be a common issue in closely held companies. Without clear agreements and processes in place, these disagreements can escalate quickly. Certain governance documents, such as a Shareholders Agreement or Operating Agreement can help to define key business aspects, such as defining voting rights, establish buy-sell mechanisms, and address deadlock issues.
Preserving Liability Protection
A primary reason for forming a corporation or limited liability company is to limit personal liability. However, there is a risk of a court disregarding that protection if a business fails to observe corporate formalities. Keeping records, documenting decisions, and maintaining separate finances can help to preserve that protection.
Third-Party Transactions
Various third parties, such as lenders, investors, and potential buyers, expect to see organized corporate records and a clear ownership structure. A lack of governance can make third party transactions difficult and can even delay financing and acquisition opportunities.
Preparing for a Sale or Succession
Whether business owners are planning to sell the company or pass it on to the next generation, well-maintained records and proper approvals are critical. Gaps in governance can create uncertainty, increase costs, and potentially reduce company valuation.
Conclusion
Most closely held companies should maintain certain core governance documents, including organizational documents (such as Bylaws or Operating Agreements), ownership agreements (such as a Shareholders Agreement), and written consents or meeting minutes documenting major decisions. These materials help clarify ownership rights, decision-making authority, and procedures for significant events like ownership transfers or third-party financing.
That said, governance does not need to be overly complex. The appropriate level of formality will depend on the size of the business, the number of owners, and the company’s long-term goals. In many cases, keeping documents current, clear, and consistent helps to provide meaningful protection without creating unnecessary administrative burden on the company.
Corporate governance is not just for large companies. For closely held businesses, establishing and maintaining basic governance practices can help prevent disputes, preserve liability protection, and position the company for the future. Taking a proactive, tailored approach now can reduce risk and avoid costly issues down the road.
JAH Can Help
The experienced corporate attorneys at Johnston Allison Hord can assist closely held businesses in establishing and maintaining effective corporate governance practices. Our team provides practical guidance on organizing governing documents, documenting key decisions, and structuring ownership and management to reduce risk and support long-term success. Click here to contact a member of our Corporate Practice Group if you need assistance.
Please note that the above JAH article does not constitute legal advice nor does it create an attorney-client relationship. Should you be in need of legal services regarding a particular matter, please reach out directly to one of our attorneys. Click here for our full website disclaimer.