The birth and lifecycle of a company
At its simplest, a company is a collection of individuals who come together to engage in some type of business activity. Like organisms, companies have life cycles. They are born, they grow, they reach maturity and, in most cases, they eventually die. If is useful for a founder to understand this lifecycle. There are several aspects on which this analogy works – the financial cycle, the product cycle, the employee growth cycle, etc. This article will look at what a company is, how it works, and its life cycle primarily from a corporate governance perspective. Starting from the company’s birth at the moment of incorporation, we will discuss its evolution to the point when it is closed down or is sold to another corporation.
The life of a company begins when the founders decide to incorporate a company with the statutory authority of their country. As part of forming the company, the founders will need to decide on the Constitution of the Company (previously referred to as the Memorandum and Articles of Association) and define the scope of the business. After this birth, the company continues to grow and evolve.
What is a Company?
A company is an association of individuals that engages in commercial, industrial or professional activities. Members pool their collective talents voluntarily in order to deliver value to society and make a profit. Companies can range in size and scope from a family-owned grocery store all the way up to a diversified multinational conglomerate such as General Electric.
Once incorporated, a company is seen by the law as separate from its owners i.e. it is a legal entity in its own right. This means that companies enjoy many of the same rights and duties as other citizens such as its founders; companies can sue (in fact a company can sue its founders), be sued, incur debts and must pay taxes. One of the key benefits of incorporation is the limited liability that a company provides for its shareholders. This means that shareholders are only responsible for a company’s liabilities to the extent that they have invested in the venture, leaving their personal assets protected against company creditors. The most liability the shareholders can incur is limited to their investment, hence the term limited liability.
A company’s owners are known as members or shareholders. These can be individuals, such as founders or senior managers, or large financial institutions like pension funds who invest money in the company on behalf of their clients and receive shares as a long-term investment. In most cases, a company operates as a “one share equals one vote” democracy. In cases where there are only a small number of shareholders, those that own the most shares of the company will have a large say in how it is run; often these shareholders are the ones who founded the company. In larger companies, shareholders normally steer clear of day-to-day corporate decision-making and delegate this function to a professional class of hired managers. However, even in such a structure the shareholders wield the ultimate power – if the majority shareholder believes a proposal to be detrimental to the future of the business, it may not be carried out.
Shareholders elect a Board of Directors who direct the managers on behalf of the shareholders. Every year, the directors hold an annual general meeting (AGM) in order to keep shareholders updated about the company’s performance and future direction. The board is mandated with ensuring the company’s financial success and meeting the needs of shareholders and other stakeholders. The chairman of the board, who may or may not also be the company’s CEO, is often regarded as a key spokesperson for the company as a whole.
In turn, the board elects key corporate officers such as the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Guided by the board, these individuals manage the business on a day-to-day basis. They also often have board seats themselves. If the CEO or other key figures do not keep the company profitable, they are liable to be replaced by the board. In smaller companies, all the senior management roles are likely to be performed by its founders.
Company Birth
Companies come into existence when the founder(s) incorporate them. It is at this stage that the venture moves from a mere idea to a real entity with legal rights and responsibilities. The precise procedure depends on the legal jurisdiction governing the area where founders choose to set up business. Typically, founders file an application with the local company registrar. In Singapore, for example, the relevant authority is Accounting and Corporate Regulatory Authority or ACRA.
The key incorporation document is called the Constitution of the Company. This document must be lodged with the Company Registrar, the authority that approves the incorporation.
The Constitution might be understood as the company’s charter. It details the company’s name, registered address and objectives. Important for shareholders, there is a clause about limited liability in the Constitution. Additionally, the Constitution will often contain other important information such as details of share capital and the number of shares held by each shareholder at the time of company formation.
The Constitution also sets out the rules by the company for carrying out its objectives . It sets out how frequently the board is to meet and the quorum required for decision-making. It also details any special rights held by the chairman and how (s)he should be elected. If management ever needs to reallocate shares or dissolve the company, the Constitution outlines an agreed procedure for how to accomplish this.
Depending on the type of business a company plans to conduct, it may have to obtain certain licenses from the government before it can start its business activities. The precise nature of these licenses will depend on where your business is based and what industry the company intends to operate in. Acquiring these licenses can take anything from a few days to several weeks.
On-going Compliance
Although each jurisdiction will have its own company law that dictates the ongoing compliance obligations for companies incorporated in that jurisdiction, listed below are a few commonly found compliance requirements that are applicable in most jurisdictions. Ongoing compliance is important in order to keep your company in good standing with the law; failure to do this can result in penalties or even prosecution depending on the jurisdiction and the seriousness of the lapse.
Companies are required to file annual reports and income tax returns. Any changes to the structureor mission of your company must also be reported. This includes name changes, changes to shareholders, directors, registered address, business activities, etc.
All hiring, firing and ongoing employment of your staff must be compliant with employment laws in your area.
Any contracts into which your business enters will be governed by contract law. This is particularly important in the case of disputes; contracts often include a clause that outlines the court or national law which is to be turned to in the event that things go sour.
The government may have enacted customer data protection and data privacy laws that you your company will need to comply with.
Your company will need to respect intellectual property laws as applicable in your country of incorporation.
There may be regulations protecting customers against misleading advertising & marketing.
Excessive regulation hinders economic activity. More regulation means a burden for businesses: managers have to spend time and money on compliance which they would otherwise have spent on improving their product or services. On the other hand, good governance ensures trust between business partners and customers; it’s impossible to do business if you are unable to make legally-binding contracts with customers, partners and suppliers. Jurisdictions such as Singapore understand this and have attracted billions in foreign investment by creating an environment that balances good governance with ease of doing business.
Company Growth
When a company is founded, it will likely have just a handful of shareholders i.e. the original founders. As it grows, it may start to add more shareholders through one or more of the following activities.
Startups can also use stock options as part of their staff incentive structure. For startups with limited capital, shares are one way to attract quality employees and offer long-term value to them.
Fast growing startups that are successful in raising VC capital will have to give up part of the equity in the company to VC firms.
Once a company reaches a certain size, it may go public and sell its shares to the public on a stock market in an event known as an IPO. This gives it access to more capital, as well as a certain degree of prestige but also significantly higher public scrutiny and compliance burden.
Small businesses that are happy with their boutique size and place more value on a long-term sustainable and steady growth may not need to add additional shareholders.
As companies grow, the role of the board of directors becomes increasingly important and their decisions become more complex. In order to avoid conflicts of interest, fast growing companies often hire external board members. Among other functions, business owners can expect their boards to audit their books, set compensation for top executives and nominate new members to the board. In return, directors can expect to be offered competitive compensation packages.
End of a company
Companies exist as legal entities independently from their owners. This means that, technically, they can go on existing forever, even after the founders are long gone. In practice, however, most companies stop operating at some point for reasons mentioned below.
In some instances, shareholders or founders choose to voluntarily shut down a venture because of retirement or other personal reasons. In this instance, it’s important to shut down the business legally by following the procedure as prescribed by local Company Law and the company’s Articles of Association.
An alternative to shutting down the business is selling it to a another firm or competitor. Some startups plan on getting acquired at a very early stage in their business development. Acquisitions are typically paid for in cash, stock or a combination of both.
Regrettably, there are some companies that go out of business when they are no longer able to repay debts. This process, known as bankruptcy, is initiated by the debtor when it becomes clear that they are no longer financially solvent. All the debtor’s assets are collected together and used to pay a portion of the outstanding debt, at which point any remaining debts are forgiven.
Conclusion
It is helpful for would-be entrepreneurs to understand the typical stages in a company’s life, from incorporation, through raising money and issuing shares, all the way to the moment when the business closes down. While some businesses inevitably end in unfortunate circumstances, starting a company often takes the founding team on a challenging, rewarding journey of personal growth on a scale they can scarcely imagine.
