Back To CourseBusiness Law Textbook
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Ashley is an attorney. She has taught and written various introductory law courses.
One of the most popular business structures is the corporation. A corporation is a complex business structure where the business is a separate entity from the individuals that run the business. A corporate structure involves various individuals working in several different management roles.
For the most part, a corporation must have shareholders, directors and officers. These individuals form the corporate hierarchy. The shareholders elect the directors, and in turn, the directors employ the officers. Let's take a separate look at each of these corporate positions.
The owners of an incorporated business are known as shareholders. The corporation must be operated in a manner that best benefits its shareholders. A shareholder can be a person, company or other entity. It's any entity that owns at least one share of a company's stock.
Although shareholders don't play an active role in the everyday business operations, they do have certain rights and duties that will be defined in the company's bylaws. Generally, shareholders have the right to:
Since the corporation is an independent entity from the shareholders, the corporation is held legally liable for its own business debts, taxes and liabilities. The shareholders typically don't bear these burdens as individuals. As owners of the business, shareholders do well if the company does well. Conversely, shareholders lose money when the company loses money.
For example, let's say that Damon buys three shares of stock in his favorite company, Doughy's Donuts. That makes Damon a shareholder in Doughy's Donuts. Damon is now invited to attend the annual meetings, can vote on the board of directors and enjoys several other shareholder rights.
Now let's take a look at the board of directors. The directors are the managers, or trustees, of the corporation. The shareholders elect the board of directors. Generally, the corporation's bylaws will set out how many directors the corporation should have.
The directors aren't agents of the shareholders, but they do owe the shareholders a fiduciary duty. This means that the directors are required to act in the best interests of the shareholders. As the managers, directors serve as the major decision makers for the company. They work as a committee and decide such key things as what executives will be hired or fired and when corporate dividends will be issued. Unlike shareholders, directors can be held individually liable for corporate activities for which they had some responsibility.
For example, let's say that Darcy and Doug are elected to serve on the board of directors at Doughy's Donuts. They then hire their cousin Daniel to serve as president of Doughy's. Daniel has no experience and no idea what he's doing. Doughy's loses so much money that it must file for bankruptcy. Shareholders, like Damon, lose money as a result. Darcy and Doug can be held personally liable for their negligence.
Lastly, let's take a look at officers. Corporate officers are high-level executives responsible for everyday business operations. Officers are agents for the corporation, meaning that they act on behalf of the corporation and can bind the corporation to contracts. They can also, therefore, be held personally liable for corporate misconduct or for gross failures.
The board of directors appoints the officers. They serve at the will of the directors unless the company's bylaws or the officer's employment contract states otherwise.
Typical corporate officers include:
For example, let's say that Daniel is still the president of Doughy's. He's an officer. Daniel uses some of Doughy's Donuts' profits to invest in his best friend's donut company. This company is called 'Darling Donuts' and is a major competitor of Doughy's, though Daniel didn't know that since he didn't research the deal. He was just trying to do a favor for a friend. Daniel, as an officer of Doughy's, can be held personally liable for his negligence and for using Doughy's profits for his own benefit.
Let's review. Many businesses are structured as corporations. A corporation is a business structure where the business is a separate entity from the individuals that run the business. The corporate structure involves shareholders, directors and officers. The shareholders elect the directors and, in turn, the directors employ the officers.
Shareholders are the owners of an incorporated business. The corporation must be operated in a manner that best benefits its shareholders, though the shareholders don't play an active role in the management of the corporation. Shareholders can't usually be held personally responsible for corporate liabilities, such as debt.
The board of directors serves as the major decision maker for the corporation. The directors are the managers, or trustees, of the corporation and owe the shareholders a fiduciary duty. Directors can be held personally responsible for corporate activities in which they had some responsibility.
Officers are high-level executives responsible for everyday business operations, such as the CEO and the CFO. They serve as agents for the corporation and can be held personally liable for corporate misconduct or for gross failures. The board of directors appoints the officers.
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Back To CourseBusiness Law Textbook
23 chapters | 174 lessons