Can an Owner Be a Manager in a C Corporation?

by John Cromwell

A C Corporation is an independent, state registered legal entity used to organize businesses. It is also an organization that has a very formal and regimented control structure. The shareholders own the business, but they do not necessarily control the day-to-day operations of the business. Instead, the corporation’s operations are directly controlled by managers and officers. A shareholder can hold a managerial position in her company, but the process of obtaining that position may be more complicated than if she had applied for the job as a non-shareholder.

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Appointment of Managers

Corporate managers, especially the Chief Executive Officer, are appointed by the corporation’s Board of Directors. The Board also reviews the managers performance regularly and if it determines that a manager is not fulfilling her responsibilities, the Board can dismiss her. The corporate bylaws will generally establish a manager’s qualifications and the procedures the board will need to follow to appoint a manager. Generally, a vote will be required. Each director generally has one vote and a majority will normally be required to hire a manager.

How Directors are Elected

The corporate Board of Directors is elected by the shareholders, subject to the terms and processes defined by the corporate bylaws. In addition to the minimal vote requirements to appoint a member, bylaws generally define the length of the directors’ term in office. Since the voting power of a shareholder is based on the number of shares she owns, a corporate owner can vote herself onto the board if she has a significant percentage of the corporation’s outstanding shares. Therefore, shareholders are often on the Board of Directors for small corporations. If a shareholder becomes a director, she can use that position to become a manager in the business.

Conflicts of Interest

If a director wishes to be appointed as a manager, this could be seen as a conflict of interest. A conflict of interest occurs when the personal interest of a director may influence her motivations regarding certain decisions she must make as a director of the corporation. Furthermore, since holding a managerial position often means receiving a salary and benefits, a director appointing herself as an officer could be considered a conflict of interest. As a result, corporate bylaws routinely include provisions that would prevent a director from voting on any initiative that would appoint her as a manager with the corporation.

Tax Issues

If a shareholder is a corporate officer who performs significant services for the C Corporation, she is considered an employee and generally entitled to receive pay. The payment she receives is treated as a wage; therefore, the corporation would have to pay employment taxes on that amount.