Corporations play a significant role in the business world. Entrepreneurs use the legal structure of a corporation to protect themselves from risks and grow their businesses into large enterprises. While you may interact with corporations nearly every day, you may not fully understand how they work.
We break a corporation down into its main parts: shareholders, directors, and officers. We explain how corporations work and how incorporating can benefit your business.
How Does a Corporation Work?
State laws require corporations to have a specific business structure and follow strict rules. Most corporations are setup as “general corporations” and have three main parts:
- Shareholders – Have ownership in the corporation.
- Directors – Make major decisions for the corporation.
- Officers – Run the day-to-day business of the corporation.
What is a Corporation, Exactly?
Corporations are legal business entities that are separate from the real people who own them, run them and work for them. When a business becomes a corporation, it becomes its own person.
In the eyes of the law, a corporation is a separate business that’s different from the real people who own it, run it, and work for it. This means that a corporation can own assets, sign contracts, and do business all in its own name.
The split between a corporation and the people who own and run it does two important things:
1.) Limited Liability Protection
First, it helps protect the owners’ (called shareholders) personal assets (like their homes and cars) if the business owes money or gets sued.
2.) Perpetual Existence
Second, the corporation can keep doing business even if the owners or managers change.
Limited liability protection is the primary benefit of registering a corporation. Limited liability ensures that a corporation’s shareholders, directors and officers are not personally accountable for the financial obligations or other liabilities of the business entity.
Corporations: Who are the Shareholders?
- Shareholders are initial investors and own parts of a corporation.
- Shareholders elect the directors and decide on major issues.
- Shareholders anticipate returns but also face investment risks.
Shareholders are the people or other entities who own parts of a corporation. Shareholders often put money in when the business is just starting out. The corporation issues official stock certificates to shareholders as proof of their ownership and rights in the company.
What Do Shareholders Do?
Shareholders play a crucial role in the corporation’s big-picture decisions. They don’t get involved in the day-to-day running of the business, but they do have an important job – they elect the board of directors. The directors are responsible for guiding the corporation’s overall strategy, so choosing the right people is essential.
Each shareholder gets a certain number of votes based on how many shares they own. So, someone who owns a lot of shares has more votes and a bigger say in who gets chosen as directors.
Shareholders also have a say in other big decisions that could affect the company’s future. For example, if the company is thinking about merging with another company, the shareholders would likely get to vote on that. Similarly, if the company wants to issue more shares, the shareholders would usually need to approve it.
In return for their investment, shareholders hope to get a financial return. This could be through “dividends”, which are payments made out of the company’s profits. Or it could be that the value of the shares increases over time as the company grows and becomes more successful.
Being a shareholder can be risky, as their investment can decrease in value if the company doesn’t do well. But it can also be rewarding if the company succeeds.
Corporations: Who are the Directors?
- Directors guide the corporation’s strategic decisions.
- Directors select corporation’s officers and represent shareholders’ interests.
- Directors are selected for their experience and industry knowledge.
Directors are like the guides or navigators of the corporation. They’re chosen by the shareholders to make significant decisions for the business. Each director sits on the Board of Directors, which is the group of people collectively responsible for the company’s overall direction. The Board of Directors is tasked with ensuring the company stays on track and moves forward towards its goals.
What Do Directors Do?
The directors don’t usually get involved in the everyday tasks of the corporation. Instead, they focus on the big picture, making strategic decisions that shape the company’s future. For instance, they might decide to open a new branch, launch a new product, or invest in research and development.
The Board of Directors meets several times a year to discuss the company’s performance, review its strategy, and make critical decisions. These meetings might involve analyzing financial reports, discussing market trends, or deciding on major projects. In Delaware, where many companies choose to incorporate, the law requires the directors to hold at least one big meeting each year. This is known as the Annual Meeting.
A critical job for the directors is selecting the corporation’s officers. These are the people who will manage the daily operations of the business. The directors must choose competent, trustworthy individuals to ensure the company is run well.
Directors also have a responsibility towards the shareholders. They must make decisions that are in the best interests of the company and its shareholders. This might mean balancing short-term gains with long-term growth, or it might involve making tough decisions during challenging times.
Directors are usually chosen because of their experience and knowledge in the business or industry. They might be veteran businesspeople, industry experts, or individuals with unique skills that can help guide the company. It’s a significant role with considerable responsibility, but it’s also a chance to guide a corporation towards success.
Corporations: Who are the Officers?
- Officers manage daily operations with roles like “President”, “Treasurer”, or “Secretary”.
- They are responsible for strategic decision-making and operational tasks.
- The board of directors oversees the hiring and firing of officers.
Officers are the individuals who handle the daily operations and responsibilities of the corporation. They’re often referred to by their specific titles, such as “President”, “Treasurer”, or “Secretary”. These roles are critical for the smooth running of the company and play a significant role in its success.
What Do Officers Do?
The President, often also known as the CEO (Chief Executive Officer), is typically the highest-ranking officer in the company. They are responsible for making major corporate decisions and setting the company’s overall direction. They also act as the main point of communication between the Board of Directors and the rest of the company.
The Treasurer, or CFO (Chief Financial Officer), handles the company’s financial affairs. This includes:
- Overseeing financial planning,
- Tracking cash flow,
- Analyzing the company’s financial strengths and weaknesses, and
- Proposing corrective actions.
They may also be responsible for investor relations, making sure shareholders are informed about the company’s financial performance.
The Secretary is usually responsible for ensuring the company meets all its legal obligations. This includes:
- Maintaining corporate records,
- Preparing minutes of board meetings, and
- Ensuring the company’s documents are in order.
Other officer roles could include the COO (Chief Operating Officer), who oversees the company’s day-to-day administrative and operational functions, or the CMO (Chief Marketing Officer), who develops marketing strategies to boost the company’s brand and increase market share.
The hiring and firing of officers are typically under the responsibility of the board of directors. This means the board must ensure they choose individuals who are capable of effectively running the company and guiding it towards its strategic objectives.
Officers must act in the best interests of the company, balancing various needs and goals. This often involves strategic thinking, decision-making, and a deep understanding of the business and its environment. Their efforts are critical in steering the company towards its goals and ensuring its successful operation.
Fiduciary Duties for Directors and Officers
Fiduciary duties are crucial for directors and officers of a corporation. These duties mean they need to act in the best interest of the corporation and its shareholders. They are guided by two main responsibilities: the duty of care and the duty of loyalty.
The duty of care means directors and officers need to make careful, well-informed decisions for the corporation. They should take time to understand the business fully, and their choices should be based on careful thought and honest judgment.
The duty of loyalty means that directors and officers need to put the corporation’s needs first, above their own. They should avoid situations where their personal interests might conflict with the corporation’s interests. They mustn’t use their job or any information they get from it for personal benefits. In simple terms, this duty is all about being loyal to the corporation and its shareholders.
If these duties are not followed, there can be legal problems. So, directors and officers should carry out their duties carefully and responsibly. Doing so will help build trust with shareholders and support the corporation’s success.
What Is Incorporation, or Incorporating?
“Incorporation”, or “incorporating”, is the process of a business becoming a corporation. Incorporation involves filling out a legal document and submitting it in the state where the business wants to be a corporation. This legal document tells the public important things about the corporation like its name, where it’s located, what it does, and how its shares (or pieces of ownership) work.
Some states call the incorporation document a “Certificate of Incorporation” or the “Articles of Incorporation”.
Where Does a Company Incorporate?
A business can register as a corporation in any state that it chooses, no matter where it does business. So you can be located in California or India and still incorporate your business in Delaware.
Each state has its own rules and steps for making a business into a corporation. Most of the time, this process is done through the Secretary of State’s office in that state. This office keeps a record of all the corporations in the state and makes sure they follow the state’s business laws and rules.
A corporation is legally governed by the laws of the state where the company is originally incorporated. This means that business owners can shop around and take advantage of the state laws that protect them best.
Which State is Best for Corporations?
Delaware is well known as being the number one state to incorporate a business. Entrepreneurs from all over the world choose to incorporate their businesses in Delaware to take advantage of the state’s business friendly laws and tax advantages.