Precautions to be taken by closely held companies?

Precautions to be taken by the closely held companies/young entrepreneurs?

      With the liberalization of economy, FDI inflow and outflow, technological innovation, growth in service sector and with improvement in communication technology, it is very nice to see many professionals starting their own companies. India needs many entrepreneurs. It is very common in the developed countries like USA and UK to start companies at a very early age and without so much background or legacy; example being Bill Gates of Microsoft and Steve Jobs of Apple Computers. In India the entrepreneurship was in slow pace initially and now it is in its peak. We need so see and encourage young entrepreneurs and we need allow hardworking and talented people to grow. With the technological innovations and communication technology, with computerisation of corporate filing and with the availability of Right to Information, incorporating a company is every easy in India now.  Now, every one can incorporate his own company without much investment, legacy and financial background and its a radical change as everyone agrees.

     But, there exist certain intrinsic issues. Broadly, the companies are of two kinds like private limited and public limited. If a company is not allowed to go public to raise funds and if the transfer of shares is restricted, then, it is private limited company as every one knows. If a company is allowed to raise money from public through prospectus or advertisement etc., its a public limited company. The present day young entrepreneur will start a private limited company initially and it will be closely held. Family members, friends and relatives etc. will be shareholders normally in closely held private companies. If the company is not successful, then, it can be wind-up voluntarily. But, if the company is successful, then, there can be some problems with profit sharing and promoter thinking of dominating the company and preventing the distribution of profits to all shareholders. It can happen and it is very common too.  Now a day, one can start a company without much investment today and it can become so big within one or two years and its very much possible.

     When a company becomes successful, then, many may try to take advantage of that though they have not done anything for the development of company. Steve Jobs says that he has taken one management guy to Apple Computers and because of him he has to leave Apple Computers despite being its founder. It’s a nice example and it can happen everywhere.

     The young entrepreneurs or the CEO's or promoters must be very careful in avoiding these possible difficulties. The easy way to attack any promoter or a majority shareholder is to allege something illegal. The minority shareholder may say that the majority is oppressing them. If the minority simply says that they are being oppressed, then, it will not certainly carry any wait. But, what happens practically is that the companies and especially closely held companies may neglect maintaining all the documents, filing the returns, recording the minutes etc., and it will give rise to minority shareholders to attack majority and create problems in the course. In India, the Companies Act, 1956 deal with the functioning and management of the companies apart from the Articles of Company. There is very good logic behind each and every provision and we can never say that a provision in the Act is illogical. And now, this Companies Act, 1956 is being repealed and a new companies act is sought to be introduced. Though, there is no commission of illegality by the majority/CEO/founder/promoter, the minority shareholders may attack majority alleging some oppression and mismanagement. In support of their allegations, the minority may show the issue of not maintaining the books, minutes etc. and majority/promoter/CEO/promoter might not have committed any illegality in fact. Its happening practically and it will happen. The young entrepreneurs must be very very careful with all this procedural issues and likely attacks as otherwise, their development be contained or reduced at times.

I want to deal with the few precautions to be taken by the young entrepreneurs and those are as follows:

       1.  He must ensure that all the documents are maintained by the company.

      2.  He must ensure that every receipt, expenditure, purchase and sales etc. are recorded properly.

       3.  He must ensure that the company files all the returns with the authority like the Registrar of Companies without any default.

      4.  He must ensure the conduct of all the meetings as required under the Act.

      5.  He should appoint or engage a qualified and able Company Secretary or the Company Law Consultant to deal with the legal and secretarial issues.

Its true that the precautions to be taken can never be inclusive and I feel that the few precautions referred to above can be very very useful for young entrepreneurs.