Introduction to Corporation Structure
Chain 2, Link 3
Copyright © 2004
Zegarelli Law Group. All rights reserved.
R. Zegarelli, Esq.
The term "corporation" means "body" and so it is.
A corporation is recognized as a legal body, a legal person. As such, it
can conduct business as a legal person. Just like you:
- You have a birthday, it has a date of
- You have a social security number, it
has a Federal ID Number, also known as a Taxpayer ID Number (TIN) and
Employer ID Number (EIN).
- You have the ability to decide things with
your brain, it has the ability to decide things with a board of directors.
- You have that ability to carry out your
decisions with, for example, your arms and legs, and it has the ability to
carry out its decisions with its officers and employees.
- You can sign an agreement yourself, or
through an agent; it can sign an agreement only through an agent.
Having said that, a corporation, as a "legal"
person is sometimes distinguished from a human being as a "natural" person.
Parts of a Corporation.
A corporation has three primary components:
- Shareholders, the owners;
- Board of Directors, the
decision-makers, acting as a group; and
- Officers, the persons carrying out
the decisions, acting individually.
A corporation is generally governed by a
representative form of government: shareholders elect the board of directors to
represent them and to make decisions for them. After shareholders elect
the board of directors, there's really not much they do, short of approving any
fundamental corporate transactions such as a sale of the company.
Shareholders also receive excess annual profits of the company as dividends, if
declared by the board of directors for distribution, as well as any residual
The board of directors is elected by the
shareholders. Generally, shareholders have one vote per share. There
are two basic voting structures for a corporation: straight, or natural, voting;
and cumulative voting.
Most simply stated, here's the way it works:
let's say there are three open board of director seats with four people running.
With straight voting, each board seat is like a separate election. This
means that anyone with at least 51% of the votes will control the election for
all three seats; that is, the 51% owner wins each election for each seat.
The 51% shareholder's choice of candidate thus is the elected candidate.
On the other hand, in cumulative voting, it is a unified election with the top
three vote getters winning the election. But there's a twist, every
shareholder gets to multiply the natural number of votes they have by the number
of open seats. Thus, in the previous example, the 51% shareholder in a 3
seat election gets 153 votes (51 votes times 3 seats), and the 49% shareholder
gets 147 votes. What this means is that if the minority shareholder
"plunks" all of his or her votes on one candidate (rather than splitting the
votes), there is no way to prevent the minority shareholder from gaining one
seat on the board of directors: the 51% shareholder cannot mathematically split
151 votes on three candidates and keep all three candidates in the top three
positions. Cumulative voting is a minority protection formula that
protects significant minority shareholders. We can help you understand
this voting structure; contact us for details.
The board of directors acts as a group, and,
generally, makes all major decisions for the corporation. The board of
directors is the "brain" of the corporation. The reason it is important to
distinguish that the board of directors acts as a group is because a board
member cannot, for example, sign a contract in the capacity as a board member.
On the other hand, officers act individually.
The officers carry out the decisions of the board of directors. The
officers, such as the President, can sign a contract on his or her own. By
the way, an "attest" signature is merely a witness signature by another
corporate officer. Whenever a corporation signs a document, it is
preferred to be done in the following format:
John Doe, President
John Doe, President, for Acme Corporation
The reason is as follows. When a human
being wants to become a party to a document, he or she can merely sign the
document. Unfortunately for a corporation, it cannot sign a document
itself, since it is only a piece of paper on file at the Department of State.
A corporation must sign the contract by an agent; that is, another separate
legal person must sign the document for the corporation. Therefore, as
shown above, John Doe is the legal person signing the contract as the agent of
Acme Corporation. The agency relationship is defined as "President."
Under the law, because the agency relationship is shown, and therefore known, to
the other party, the agent is no liable for the acts taken on behalf of the
corporation--only the corporation is liable on the contract.
Similarities for Limited Liability Companies.
A limited liability company works basically the
same as a corporation. The distinctions are as follows:
- Rather than a board of directors, an LLC has
a board of managers or a sole manager with basically the same function.
- Rather than shareholders, an LLC has
- Rather than bylaws and a shareholder
buy/sell agreement, an LLC has an operating agreement that combines the
purposes of both of those documents.
It is especially important to become familiar
with the structure of a corporation when structuring transactions. For
example, let's say you're raising funds. You need to know whether you are
merely selling stock to a new potential shareholder and/or whether that new
shareholder will become a board of director member and/or whether that new
shareholder will become an officer of the company. Not properly
structuring the deal can have devastating consequences.
Contact us for details.
See also our publication on
Choice of Entity and