Directors, officers, and shareholders: understanding corporate structure
If you’re thinking about incorporating your business, understanding corporate structure will be a big help. There are three main groups of people who control a corporation's operations: directors, officers, and shareholders. Each group has their own functions and responsibilities.
The board of directors makes key decisions
When you first incorporate your business, you’ll list the members of your board of directors in your business’ bylaws. There’s no set number of people for a board of directors, and you can use several different methods for choosing them.
The board might be formed from people with good businesses sense that will benefit your company. Alternatively, if your company is non-profit, you might select individuals who represent the groups benefiting from your business. Once your corporation is established, the shareholders will vote to elect new members of the board.
The board’s primary responsibility is to make key decisions that help the company move forward. Ultimately, it’s the board of directors who are accountable for the company's actions.
The officers carry out the board’s decisions
After the board agrees on a course of action, the company’s corporate officers implement the decision. This could involve things like engaging in new marketing initiatives, acquiring other companies, or working to alter a company’s reputation.
Officers also oversee everyday tasks, such as managing financials and taking care of HR necessities. Some common types of corporate officers include:
- Chief executive officer
- Chief financial officer
- Vice president
- Chief legal officer
- Chief operations officer
The shareholders own the business
Whether there’s only a handful of them or thousands, the shareholders own the business. They may attend annual meetings and vote for new members of the board of directors. But other than that, they don’t have a major role in a corporation’s operations.
However, shareholders who own a large portion of the company may still exercise significant control because the number of votes a shareholder has corresponds to the number of shares he or she has. Some shareholders may own less than 1% of a business. Other shareholders may own 50% or more of a corporation.
In some cases, there is crossover among the three groups. For example, the chief executive officer is commonly the chairman of the board of directors, and may also hold a significant amount of stock in the company.
A LLC works similarly to a corporation
An LLC, or limited liability corporation, generally works in the same way as a corporation. However, LLCs are typically smaller, and their corporate structure is simpler. As explained by attorney Gregg Zegarelli:
- Rather than a board of directors, a LLC has a board of managers or a sole manager with basically the same function.
- Rather than shareholders, a LLC has members.
- Rather than bylaws and a shareholder buy/sell agreement, a LLC has an operating agreement that combines the purposes of both of those documents.
S corporations also work in much the same way as C corporations. The main differences are that S corporations are taxed differently and have certain ownership restrictions.
Corporate structure has several effects
Incorporating your business comes with many advantages. It protects you from liability, gives you easier access to capital, and helps your business gain credibility. However, incorporation does require you to surrender a measure of control.
To stay on top of your business, it’s essential to understand corporate organization structure. A business attorney can help you through the steps of incorporation and explain local laws dealing with business structure.