A business that operates as a corporation generally drafts bylaws – a document that governs all aspects of the company. Commonly, the bylaws will provide the limitations on the type of transactions the corporation can engage in, the rights of owners, the role of the board of directors and how the business will be managed by officers.
The corporation itself is a separate entity from the individuals who own and manage it. The procedures governing how to create the corporation depend on the laws of the state in which it’s formed, but overall, the process is similar across jurisdictions. In Delaware, for example, a popular jurisdiction for corporate formation, creating a separate corporate entity requires the filing of a certificate of incorporation with the Department of State. The certificate isn’t complicated and only requires a few pieces of essential information, such as the name of the corporation, the number of shares it can issue and the name and address of a registered agent that can accept legal documents on behalf of the corporation. The benefit is that all contracts, debts and other obligations of the business are the sole responsibility of the corporate entity.
Owners of Corporation
The owners of a corporation, known as shareholders, provide the necessary capital to the business in exchange for shares of stock, which represent a percentage of ownership in the business, and -- for holders of some classes of stock -- the right to vote on corporate matters. Because the corporation is recognized as a separate legal entity, shareholders can invest in corporations without being subject to personal liability for corporate debts. They do, however, risk losing their initial capital contributions if the business isn’t profitable. But on the other hand, if the business does well, shares can increase in value and shareholders can usually sell their stock at a profit and may even receive periodic dividend payments from corporate earnings.
The officers of a corporation are employees of the corporation who are responsible for the daily management and decision making of the business. Senior officers include the company’s president or chief executive officer, chief operating officer, chief financial officer and treasurer, among others. For example, a corporation’s chief financial officer can be responsible for various departments within the corporation, such as tax, accounting and financial reporting. Although all officers are subordinate to the CEO, the CEO must answer to the corporation’s board of directors. However, it’s also possible for the CEO to serve both as an officer and as a member of the board.
Board of Directors
Large corporations, especially those that are public – meaning their shares trade on a public stock exchange – have a board of directors responsible for overseeing the corporation. Each member of the board is elected by shareholders and must make decisions affecting the corporation with the shareholders’ best interests in mind. The board is not responsible for the day-to-day management of the company, but instead, it makes high-level decisions with regard to long-term strategies of the company, selecting those who will serve as executive officers, establishing officers’ compensation and determining the scope of each officer’s authority.