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Introduction to Corporation Structure
 
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Copyright © 2004 Zegarelli Law Group. All rights reserved.
Written by Gregg R. Zegarelli, Esq.

 


Generally.

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 incorporation;.
  • 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 liquidation value.

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:

ACME CORPORATION

By: ____________________
John Doe, President

or

_______________________
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 members.
  • 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 Business Questions.

 
 

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