There are many small businesses that are formed and operated entirely by a small group of people. Despite the fact that the businesses have been incorporated and are thus subject to the laws related to corporations, in those instances it is often hard for people to understand the different roles in which they are acting because they are both a Director and an Officer of the corporation. Nonetheless, it is important that people understand the distinction between these two roles as well as the role of the shareholders of the corporation.
A shareholder is someone to whom a share of stock has been issued. The shareholders of the corporation are the individuals who actually own the corporation. It is easy to understand this role if you think of owning a share of stock in a large corporation, for example Intel. Your share of stock makes you an owner of Intel. The same is true in a small corporation. Though you own a portion of the corporation, it would be infeasible to have each shareholder participate equally in every decision and action which the corporation must undertake on a daily basis. Accordingly, the shareholders elect a Board of Directors. That election usually occurs either by ballot or at an annual meeting.
Corporations can have different numbers of Directors and the Directors, once elected, serve the term identified in the corporations governing documents. The Directors are the individuals elected by the shareholders to be responsible for overseeing the big picture for the corporation and making decisions and taking broad action on behalf of the corporation. The Directors generally meet quarterly, or more often, to consider the big issues and overall direction of the corporation. For example, the Directors might decide whether or not to lease certain property or whether to hold a certain marketing event. The Directors will also be advised of the general financial status of the corporation and will review profit and loss statements. Though the Directors have substantial responsibility for the corporation and, obviously, must answer to the shareholders for the direction and stability of the corporation, they do not undertake the day to day business of the corporation. In order to provide for the day to day operations, the Directors appoint the officers of the corporation.
Each corporation will have at least a president, a secretary and a treasurer, though any corporation can choose to have additional officers if necessary. The officers are the individuals which actually handle the day to day operations of the corporation. For example, if the Directors decided to lease property, the officers would be responsible for locating the property, negotiating a deal subject to the direction of the Directors and actually signing the lease. As another example, the Directors of the corporation do not deposit each dollar earned by the corporation, this would be the job of the officers who would then account for the earnings and be prepared to present that financial information to the Directors.
Thus, in trying to determine which hat each person is wearing when acting on behalf of the corporation it is best to think of the various roles as a flow chart. The shareholders are the owners at the top of the flow chart. The shareholders elect a group of individual Directors to direct the corporation. The Directors appoint officers to follow through with the Directors direction and act on a day to day basis on behalf of the corporation.
Posted on January 13, 2015 by J. Mahe
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