When you incorporate and get shareholders, it may seem that you have found a way to simplify your business and make it safer for you and your family. While in some respects this is true, the fact remains that the decision to incorporate and get shareholders means that you have additional responsibilities.
One of the responsibilities that tends to surprise most business owners the most is that they soon realize they are more accountable to the shareholders than they anticipated. Decisions that you might not have thought were a big deal suddenly become far more important. You will have to make sure that you disclose any benefits you may be receiving as the CEO if a deal is being made.
Making the Disclosure
The disclosure does not have to always be made to the shareholders. In many states, it is enough if you make the disclosure to the board of directors. In some states though, you will have to make that statement to the shareholders if most of the board of directors will be sharing in the benefit. However, according to LegalZoom, most of the time this still falls under the business judgment rule. It’s difficult to violate the business judgment rule, but if you want to be safe, then disclose everything.
The disclosure at a minimum must disclose all of the benefits and the relationship. You will need to make sure that you give precise details when reporting to the board of directors. You do not have to give such detailed information to the shareholders in most states.
Family Relationships and Friendships Must Also Be Disclosed
Another area of surprise for many business owners is the realization that they must also report on benefits that their friends and family members may receive from a business deal. Make sure that you address any concerns straight forward. You should also make sure to provide your reasons for choosing friends and family members or choosing an opportunity that will allow them to benefit.
Verify Your Information and Reasoning for the Requested Deal
The fact that you or your family members may benefit from a deal does not mean that it is a bad one. When presenting the matter to the board of directors or to the shareholders, give your reasons. If, for instance, your mother has exceptional skills in marketing and has managed similar projects in the past, make sure to bring samples of the work and analogize to the current project. When you can objectively justify the reasons that you have chosen a business deal or opportunity, you better protect yourself.
The risk of not making the disclosure is that you can potentially be charged with not acting in the corporation’s best interests. The corporation is its own legal entity, and you have to answer to the shareholders and board of directors. Through giving full disclosure, you protect yourself. Make the disclosure early enough for them to evaluate it, and make sure that you provide all the details.