Corporate Structure: From Directors to Shareholders
A typical corporation's structure consists of three main groups: directors, officers, and shareholders. The officers handle the day-to-day operations of the business. The directors oversee the organization's affairs and protect the shareholders' interests. The shareholders seek a return on their investment. This article describes the roles and responsibilities of these groups.
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Corporate Structure: Board of Directors
One of the first steps a new corporation will take is to name the members of its board of directors. Usually, the articles of incorporation or bylaws of the corporation identify directors. Or the person who takes the initial step of incorporating the business (the "incorporator") selects them. Shareholders typically elect directors at annual meetings once the corporation is up and running.
The board of directors forms the backbone of a company's governance. They oversee the broad direction and policy of the business. Their responsibilities include making major decisions and holding regular board meetings. They also must ensure the best interests of the company are always a priority.
The board has a fiduciary duty in both private companies and public corporations. This duty is to act in the company's favor, often guided by a well-crafted business plan. The board might also have hands-on management for small companies, especially in the early days.
Board of Directors: Duties and Responsibilities
As suggested by its name, the board of directors directs the corporation's affairs and business path. The board of directors also has ultimate legal responsibility. They are responsible for the actions of the corporation and its subsidiaries, officers, employees, and agents. A corporate director's duties and responsibilities include:
- Acting on behalf of the corporation and its best interests with an appropriate duty of care at all times
- Acting with loyalty to the corporation and its shareholders
- Participating in regular meetings of the board of directors
- Approving certain corporate activities and transactions. This includes contracts and agreements and the election of new corporate officers. It also includes asset purchases and sales, approval of new corporate policies, etc.
- Amending the corporation's bylaws or articles of incorporation
The number of directors serving on a corporation's board usually depends in part on the size of the business and its holdings. The corporation's articles of incorporation or bylaws typically state this number. A small corporation might have one director (who may also serve as the sole officer and shareholder). A large corporation may have 10 or more people on its board of directors. A corporation with more than one director should keep an odd number of directors on its board. This is important for voting.
Corporate Structure: Corporate Officers
Corporate officers are the individuals responsible for the day-to-day management of the corporation. These officers carry out the strategies set by the board of directors. They manage various aspects like internal revenue, business operations, and company management. In a limited company, these officers play a vital role in maintaining the legal and financial health of the business. They operate within the guidance of the company's board of directors.
Corporate Officers: Duties and Responsibilities
The corporation's officers oversee the business's daily operations. They have legal authority to act on the corporation's behalf. This power extends to almost all lawful business-related activities. The corporation's board of directors usually appoints officers. Specific positions may vary from one corporation to another.
They can include:
- Chief Executive Officer (CEO) or President: The CEO has ultimate responsibility for the corporation's activities. They sign off on contracts and other legally binding actions on behalf of the corporation. The CEO reports to the corporation's board of directors.
- Chief Operating Officer (COO): Charged with managing the corporation's day-to-day affairs, the COO usually reports to the CEO.
- Chief Financial Officer (CFO) or Treasurer: The CFO is responsible (directly or indirectly) for almost all the corporation's financial matters.
- Secretary: The corporation's secretary is in charge of maintaining and keeping the corporation's records. They maintain documents and record minutes of shareholder meetings.
One person may be a smaller corporation's sole director, officer, and shareholder.
Corporate Structure: Shareholders
Shareholders, or stockholders, are the owners of a company. A corporation's shareholders have an ownership interest in the company. They have this through money invested in the corporation. A share is an apportioned ownership interest in the corporation. The value of a single share can range from less than a 1% interest in the corporation to 100%.
In a public company, anyone can become a shareholder by purchasing stock. Private companies have more control over who can be a shareholder. The shareholders' agreement outlines their rights and obligations. Majority shareholders, holding more of the company's stock, have more influence. They have the power to elect board members and make major decisions.
Issuing Stock to Shareholders
Owners are usually the original shareholders when a corporation is first formed. In smaller corporations, these initial investors may remain the sole shareholders. A smaller corporation's few shareholders may include those involved in day-to-day operations. These people may serve as business owners, managers, or employees of the corporation. In smaller corporations, one person may be the sole director, officer, or shareholder.
Private investors may decide to invest money in a larger corporation at anytime. Investors may include members of the general public if the corporation goes public. They will then become shareholders. Each shareholder usually receives a stock certificate from the corporation. This certificate identifies the number of shares held by the investor.
Shareholders: Duties and Responsibilities
Corporations usually must hold annual shareholder meetings under the law. At these meetings, the shareholders will elect the corporation's directors. Special shareholder meetings may occur in rare situations. This might be when significant corporate actions need shareholder approval. These events include major transactions or changes in the stock plan. A corporation's articles of incorporation usually set forth shareholder voting rights and procedures. State law might also set default rules within your jurisdiction.
Corporate Structure: Advisory Boards and Small Businesses
An advisory board can be valuable for small businesses and startups. Advisers are unlike formal board members. Advisers offer guidance and expertise without the legal responsibility of directors. They can help refine the business structure and offer strategic advice. They can also provide valuable networking opportunities. These benefits are crucial for growing a business. This is especially beneficial for entrepreneurs learning the ropes of business management.
Get Legal Help With Your Corporate Structure Questions
From directors to shareholders, corporate entities are complex. They involve a wide range of stakeholders. If not formed under corporate laws, you can increase your liability exposure. Contact an experienced business organization lawyer if you're starting a corporation. They can help ensure you follow the laws governing corporations.
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