Who Really Owns a Corporation?

A corporation is a separate legal entity controlled by people or entities with share ownership. This article explains corporations, corporate ownership, shareholder rights, how a corporation is structured, and the steps to form a corporation.

What Is a Corporation?

A corporation is a business structure that operates as its own legal entity. That means the corporation can enter into and be bound by contracts, initiate lawsuits, and be sued. The benefit of this type of business organization is that a corporation offers limited liability protection to the owners of a corporation.

For example, Dan operates a mobile car detailing service. As a sole proprietorship, he is personally responsible for the debts and lawsuits of his business. If a client were to sue him for damage to a vehicle, a lawsuit might attach to his personal assets. However, if he forms a corporation, “Dan’s Detailing, Inc.,” any debts or lawsuits are the corporation’s responsibility and do not affect his own assets that are separate from the business.

Who Owns a Corporation?

A corporation is owned by its shareholders. Shareholders buy stock in the company, and their control and interest are determined by the percentage of shares they own. Let’s look at a few examples:

One Shareholder

Dan creates a corporation, “Dan’s Detailing, Inc.,” with 100 shares of stock. If he buys all the shares, he is the sole owner. Dan has 100% of control over the corporation.

Multiple Shareholders

Dan invites his brother, David, to invest in the company. If David buys 40 shares of stock, he is a 40% shareholder and Dan still retains control as he is the majority shareholder. However, if David buys 50 shares of stock, Dan and David are co-owners at 50% each and must agree on company decisions.

A small business might issue shares to stockholders to help fund its startup operations. They define the number of shares and par value in the articles of incorporation filed with the Secretary of State.

Shareholders of Public Corporations

Public corporations, such as Coca-Cola or Apple sell shares to thousands or millions of people. A public corporation must be registered with the Securities and Exchange Commission (SEC) to sell stock to the public. Many public corporations are listed on the Nasdaq or NYSE, where investors buy stock at a share price. The shareholder value can fluctuate with the ups and downs of the stock market. The main difference between a public company and private corporation is that a private corporation can limit who it issues shares to. A public company can sell stock to anyone to raise significant capital for its business.

A small business owner may wish to remain a private company, allowing only minority shareholders, so that they can retain control over the business’s decision-making.

Shareholder Rights

As part-owners of a corporation, shareholders may have certain rights such as the right to:

• Vote on important business matters

• Receive dividends based on corporate profits

• Receive financial information on the business operations

• Sell or transfer their shares

• Sue the corporation for violation of fiduciary duties

• Receive a share of the corporation’s assets if the corporation is dissolved.

Since the shareholders are the true owners of the corporation, they have a say in the corporation.

Anatomy of a Corporation

The corporate structure involves corporate shareholders, a board of directors, and officers. The shareholders elect the board of directors, whose voting rights are reflected by their share of corporate ownership. The board of directors holds annual meetings and is responsible for corporate governance. The board appoints corporate officers with titles such as President, Secretary, and Treasurer.

The officers run the day-to-day operations of the corporation. The directors and officers have a fiduciary duty to act in the corporation’s best interest and avoid self-dealing or conflicts of interest. For example, a Chief Financial Officer (CFO) who insists on using a particular accounting firm but does not reveal that they are part-owner of the firm and charge higher fees than other accounting firms in the area is benefiting themselves over the corporation’s interests.

Steps to Forming a Corporation

While specific formation requirements vary from state to state, there are common steps to create a corporation, such as:

• Choosing a name for the business entity

• Filing articles of incorporation with the Secretary of State

• Drafting bylaws for your corporation

• Appointing directors

• Issuing stock

• Following federal and state laws, such as applying for an employer identification number (EIN), getting business licenses and permits, setting up employment accounts, etc.

Get Legal Help With a Corporation

Corporations and limited liability companies are popular among entrepreneurs as they provide liability protection. You may want to talk to a business attorney to make an informed decision on which structure is best for you. If you are looking to form a business entity yourself, you can use our trusted partner, LegalZoom.