4.2.4 Corporate Governance and Compliance Requirements Corporate governance refers to the structure, policies, and procedures that guide the management and decision-making processes of a business entity. Compliance involves adhering to state and federal regulations, ensuring transparency, accountability, and legal protection for stakeholders. Each entity type has different governance and compliance obligations: (i) Corporations (C and S Corps). Corporations must follow formal governance structures, requiring a Board of Directors to oversee operations and officers (such as CEO, CFO, and Secretary) to manage daily activities. They must hold an annual shareholders meeting and regular board meetings, document meeting minutes, and maintain corporate records. Failure to comply can lead to loss of liability protections. Additionally, publicly traded corporations face strict Securities and Exchange Commission (SEC) reporting requirements, while privately held corporations have fewer disclosure obligations but may still need to file annual reports with the state. (ii) Limited Liability Companies (LLCs). LLCs offer greater flexibility in governance. They can be managed by members (owners) or appointed managers, as specified in the Operating Agreement. Unlike corporations, LLCs are not required to hold formal meetings or maintain extensive records, though it is advisable to do so to reinforce liability protection. Some states mandate periodic filings, such as an Annual Report, but LLCs generally have fewer compliance requirements than corporations. (iii) Partnerships (GPs, LPs, LLPs, LLLPs). Governance in partnerships is dictated by the Partnership Agreement, which defines each partner’s rights, responsibilities, and profit-sharing arrangements. General Partnerships (GPs) do not require formal governance structures, but Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) must file periodic reports with state agencies. Limited Liability Limited Partnerships (LLLPs) provide liability protection for general partners but require additional compliance filings. 4.2.5 Taxation and Filings Taxation in the U.S. varies by business entity type, impacting how income is reported, taxed, and distributed to owners. Businesses must comply with federal, state, and sometimes local tax regulations. Certain entities, like corporations, are subject to direct taxation, while others, like LLCs and S Corporations, allow income to pass through to owners’ personal tax returns. Additionally, businesses must adhere to ongoing filing obligations, including income tax returns, payroll tax reporting, and regulatory compliance filings. (i) Corporate Taxation (C Corporations). C Corporations are subject to a 21% federal corporate tax rate, plus applicable state and local taxes, which vary by jurisdiction. Unlike pass-through entities, C Corps experience double taxation, where profits are taxed at the corporate level and again when distributed to shareholders as dividends. However, retained earnings within the corporation
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