What Is Corporate Structure? - Definition, Types & Examples Video

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  • 0:01 Definition of…
  • 1:05 Shareholders
  • 1:54 Board of Directors
  • 4:26 Officers
  • 5:42 Lesson Summary
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Lesson Transcript
Instructor: Andrea Rea

Andrea is a practicing attorney and MBA with 15 years experience in health care administration, litigation and business law.

Corporations are a powerful force in business. It's important to understand how they are controlled, owned and operated. Learn the key concepts of corporate structure, and test your knowledge with the quiz that follows.

Definition of Corporation and Corporate Structure

A corporation is a form of organization that has an existence independent of its owners. Corporations have powers and liabilities separate and distinct from those of its owners. They can be organized for many purposes and can come in many types. For example, a municipal corporation is a city, county, or town operating under a corporate charter granted by the state, while a public corporation is owned and operated by the government. This lesson will focus on corporations that are engaged in business.

Corporate structure refers to how a business is organized to accomplish its objectives. The corporate structure of a business is important because it determines the ownership, control, and authority of the organization. In a corporation, these characteristics are represented by three groups: shareholders, directors, and officers. Ownership belongs to the shareholders. Control is exercised by the board of directors on behalf of the shareholders, while authority over the day-to-day operations is vested in the officers.

Shareholders

In a corporation, a group of shareholders have shared ownership, represented by holding shares of common stock. Most business corporations are established with the goal of providing a return for its shareholders in the form of profits. Shareholders have the right to share in the profits of the business but are not personally liable for the company's debts. This concept is known as limited liability and is one of the main advantages of the corporation as a form of doing business.

If you decide to invest in a few shares of your favorite fast food company, does that give you the right as a shareholder to show up at corporate headquarters and start making decisions? Generally not. Instead, shareholders elect a board of directors who oversee the management of the corporation.

Board of Directors

The board of directors is responsible for overseeing and directing the business of the corporation in the best interest of the shareholders. The key point here is oversight; the board is not expected to actually operate the business. Rather, its purpose is to oversee operations, approve major plans, and monitor financial performance.

The board generally performs the following functions:

  • Select, evaluate, fix the compensation for, and, when necessary, replace the company's chief executive officer
  • Oversee the business operations to evaluate whether the business is being properly managed
  • Review and approve major corporate plans, financial objectives, annual budgets, and strategies
  • Review the adequacy of financial accounting, auditing, and other systems to comply with applicable law

Authority for these responsibilities is typically derived from each state's corporate statutes, which delegate to the board the duty to manage the business of the corporation. The board doesn't have total control, though. Some important decisions affecting the corporation require a shareholder vote. The statutes specify the matters that must be acted upon by the shareholders, including amendments to the certificate of incorporation or bylaws, the election of directors, the sale of all or substantially all of the corporation's assets, and the merger or consolidation of the corporation.

The board of directors is generally comprised of three types of people. The chairman of the board is technically the leader of the corporation, responsible for running the board effectively. The chairman is usually elected from the board of directors. The chairman's duties include maintaining strong relationships and open communication with the chief executive officer and other executives, formulating business strategy, and representing the company's management and board to the general public and shareholders.

Other board members may be inside directors, who are either major shareholders, high-level managers from within the company, also known as executive directors, or someone else with a direct connection to the business. Inside directors can offer the board a perspective on the business from the inside. Outside directors are not employed by the company and do not represent any of its stakeholders. They might be other business leaders from the community, retired legal or financial professionals, or other influential people. They can provide an unbiased, objective perspective on issues brought to the board.

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