When you decide to form a business, one legal entity type you can choose is the corporation. The corporation is one of the more complex but also one of the most trusted legal business forms. A key consideration is the way a corporation is managed: it has an intricate structure, built-in oversight, and a somewhat flexible ownership scheme.
Corporate structure is based on state law requirements and your desires as a corporate owner (also known as a shareholder). The unique feature of a corporation’s structure is the clear demarcation between ownership and management. The basic form of corporate governance involves three tiers of leadership: (1) shareholders, (2) a board of directors, and (3) officers or executives.
Shareholders are the owners of a corporation. They are not involved in the day-to-day operations of the corporation but are integral to determining the business’s purpose. As the owners of the company, the shareholders are required to conduct at least one annual meeting. The bylaws, created and ratified shortly after formation, determine the shareholders’ and directors’ voting structure. Shareholders should also create a document called a shareholders’ agreement. Shareholders’ agreements outline specific rights and responsibilities the shareholders have to each other and to the corporation. These agreements can also include buy-sell provisions, which are rules and limitations regarding the transfer of their interests. Your shareholders’ agreement should also contemplate what should occur in instances of death, disability, divorce, bankruptcy, and other disruptive life events that could impact the ownership of the corporation.
Board of Directors
The shareholders of the company elect the board of directors, which ensures that the shareholders’ vision is appropriately executed. The board of directors is not involved in the day-to-day actions of the business; however, the directors provide critical oversight. One key trait of the board of directors is that the directors owe fiduciary duties to the corporation and the shareholders. The duties owed are the duty of care, which requires them to exercise care in their deliberations and decisions, and the duty of loyalty, which requires them to make decisions in the corporation's best interests. As you consider the selection of your board of directors, keep the following points in mind:
It is advisable to select an odd number of people to serve on your board of directors to avoid deadlocks in voting.
The people elected as directors will oversee those appointed as officers, so it is critical to consider individuals who can be entrusted to make significant decisions and lead others.
The next tier of leadership is the executive officers, appointed by the board of directors. This group includes the president, vice president, treasurer, and c-suite executives like the chief executive officer, chief operations officer, or a combination of the two. Some states mandate that every corporation have a president and a treasurer to form the corporation. These executives are in charge of the business’s daily operations.
Generally, when dealing with smaller corporations such as family-owned corporations, it is not unusual to find that the lines between these three leadership tiers are blurred. In the most basic corporations, you may have a single shareholder and a director. In some states, state law mandates a minimum number of directors. Whether the corporation is privately or publicly held is another factor that distinguishes how these structures interact.