How are corporations structured? What must you do to fund them and take money out? How do you set them up? What are best business practices?

I’ve talked in previous blog posts about specific aspects of closely held businesses, such as shareholder disputes and the rights of minority shareholders. Today, I want to get back to basics with a series that I’m calling Corporations 101.

Let’s start with the first question above: What is the structure of a corporation?

No matter their size, corporations typically consist of four different tiers: shareholders, directors, officers and employees. Each of these legal roles comes with specific duties and responsibilities, but in the smallest of closely held businesses, a very small group of people may play them all. In such companies, one or two persons may fill four different roles each. They simply wear different hats at different times.

The tasks of the shareholders include electing and removing the directors of the corporation, amending the bylaws and the articles of incorporation, and approving mergers, reorganizations and the sale of corporate assets. In California, pursuant to the California Corporations Code, shareholders also need to hold at least one meeting a year.

Who runs the company? Who makes the business run?

The directors of a corporation are not involved in the daily operations of the business, but in the end they do run the company. They manage the corporation by appointing the officers and terminating their contracts. They make major decisions such as the issuance of stock, or the sale, purchase and lease of real estate. Their ultimate responsibility as directors is to protect the shareholders’ investments.

The articles of incorporation usually determine the number of directors in a corporation. But California law requires a minimum of three directors for every corporation. If a corporation only has one or two shareholders, there must be at least as many directors as there are shareholders.

The officers of a corporation are responsible for its day-to-day operation. In California, each corporation must have at least three officer positions; they are president, secretary and treasurer. The treasurer is responsible for the finances, and the secretary is in charge of keeping the company records and documents as well as the minutes from shareholder meetings.

Ultimately the responsibility for the corporation’s day-to-day activities rests with the president. All officers report to the board of directors.

Last but not least, there are the employees. They receive a salary and maybe even additional benefits like healthcare. Reporting to the officers, they are the ones who make the business run.

By Kevin J. Moore