Corporate Structure: 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 affairs of the organization and protect the interests of the shareholders, while the shareholders are looking for a return on their investment. The roles and responsibilities of these groups, which sometimes overlap, are described in more detail below.
Board of Directors
One of the first steps a new corporation will take is to name the members of its board of directors. Usually, directors are identified in the "articles of incorporation" and/or "bylaws" of the corporation, or are selected by the person who takes the initial step of incorporating the business (sometimes called the "incorporator"). Once the corporation is up and running, directors are typically elected by shareholders at annual meetings.
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 for the actions of the corporation and its subsidiaries, officers, employees, and agents. A corporate director's duties and responsibilities typically 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 -- including contracts and agreements; election of new corporate officers; asset purchases and sales, approval of new corporate policies; and more;
- 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, but this number is typically stated in the corporation's articles of incorporation and/or bylaws. A small corporation might have one director (who may also serve as the sole officer and shareholder), while a large corporation may have 10 or more people serving on its board of directors. For voting purposes, a corporation with more than one director should keep an odd number (3, 5, 7, etc.) of directors on its board.
The corporation's officers oversee the business's daily operations, and in their different roles they are given legal authority to act on the corporation's behalf in almost all lawful business-related activities. Officers are usually appointed by the corporation's board of directors, and while specific positions may vary from one corporation to another, typical corporate officers include:
Chief Executive Officer (CEO) or President. The CEO has ultimate responsibility for the corporation's activities, and signs off on contracts and other legally-binding action 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 directly to the CEO.
Chief Financial Officer (CFO) or Treasurer. The CFO is responsible (directly or indirectly) for almost all of the corporation's financial matters.
Secretary. The corporation's Secretary is in charge of maintaining and keeping corporation's records, documents, and "minutes" from shareholder meetings.
Keep in mind that in smaller corporations, one person may serve as the business's sole director, officer, and shareholder.
A corporation's shareholders have an ownership interest in the company, by having money invested in the corporation. A "share" is an apportioned ownership interest in the corporation, and the value of a single share can range from less than a 1% interest in the corporation, to 100%.
When a corporation is first formed, its original owners are usually its first shareholders, and in smaller corporations these initial investors may remain the sole shareholders throughout the corporation's existence. A smaller corporation's few shareholders may consist of those involved in day-to-day business operations (as owners, managers or employees). Remember that in smaller corporations, one person may also serve as the business's sole director, officer, and shareholder. Where larger corporations are concerned, private investors (or members of the general public if the corporation "goes public") may decide to invest money in the corporation at any time, and will become shareholders. Whatever the number of shareholders in a corporation, each shareholder usually receives a stock certificate from the corporation, identifying the number of shares held by the investor.
Corporations are usually required by law to hold annual shareholder meetings, at which the shareholders will elect the corporation's directors. Special shareholder meetings may also be held in rare situations, when significant corporate actions require shareholder approval -- including major transactions and changes in the corporation's stock plans. A corporation's articles of incorporation (combined with state law requirements) usually set forth shareholder voting rights and procedures.
Need Help Understanding the Structure of Your Corporation? Ask a Lawyer
If you have started -- or are in the process of starting -- a corporation, then you likely have been working with an attorney. If not, you may want to have a business organizations attorney help you structure your corporation effectively and legally.