The Basic Elements of Corporations: Shareholders, Directors and Officers

Corporations are two-level structures. They feature a passive ownership level (the shareholders) and an active management level (the officers and directors). Shareholders are passive and protected by law from personal liability for the debts and actions of the C Corporation. They are liable only to the extent of their investment. In other words, you can only lose the amount you pay in for your shares.

Directors are elected by the shareholders, and are responsible for both electing and directing the officers, who carry out the day to day business of the corporation. Although powerful, directors are not permitted to involve themselves in active operations. For example, directors are not authorized to sign agreements and bind the corporation.

The officers are the people you most associate with corporations – i.e., the President, Vice-Presidents, CEOs, Treasurers, etc. Officers are the ones who carry out the daily business of the corporation. These are the people who will sign checks, enter into agreements, etc.

Officers and directors do not have to be shareholders of a corporation, although in many cases they are. Because there are no minimum numbers of owners, single-person corporations, where one person holds all of the offices, is a director and is also a shareholder is common. There is no requirement that everyone hold a position in a corporation. You could have a two-owner corporation where one owner is simply a shareholder and the other owner holds all the officer and director positions.

Corporations are typically governed by a blend of state law and an internal operating document, called the Bylaws. As long as there are no conflicting provisions between the Bylaws and state law, the Bylaws will be the primary source of information for how the corporation operates, i.e., how officers and directors are elected and removed, what powers the officers and directors have, when and how the corporation is required to pay out its profits (called dividends), when and how meetings of the shareholders and management may be called, and so on.

Corporations are formed by filing a document, typically called the Articles of Incorporation, at the Secretary of State level. They are required to maintain a registered agent in the state of formation (and any states they also do business in and are registered in) and in almost all states they must file a yearly report at the state level.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

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