What Is the Difference in the Board of Directors and the Stockholders of a Corporation?

By Jennifer Kiesewetter, J.D.

What Is the Difference in the Board of Directors and the Stockholders of a Corporation?

By Jennifer Kiesewetter, J.D.

Corporations are more complex than other types of business entities. In addition to the day-to-day operations of a corporation, you have a board of directors that is responsible for the overall course of the corporation. The board of directors is ultimately accountable to the stockholders, who have collective ownership in the corporation. The board of directors have a legal obligation to grow the corporation, make the corporation prosper, and not lose money for the stockholders.

Businesspeople smiling in an office

Here are the key differences between the board of directors and the stockholders of a corporation.

Board of Directors

The board of directors is responsible for directing the corporation's affairs. It also has the ultimate legal responsibility for the actions of the corporation and its subsidiaries, officers, and employees.

A corporation's articles of incorporation or bylaws, which set forth the rules for governing the corporation, identify the board of directors. Directors typically serve for set terms, as determined by the articles of incorporation or the bylaws, and are elected by stockholders at annual meetings.

Duties of Directors

The board of directors is not responsible for the day-to-day decisions of the corporation, instead, they're responsible for the corporation's overall direction and oversight on behalf of the stockholders. Thus, a director's duties typically include:

  • Acting on behalf of the corporation's best interest at all times
  • Being loyal to the corporation and its stockholders
  • Amending corporate documents as required
  • Approving and ratifying certain corporate transactions, such as agreements, purchases, sales, and approval of corporate policies
  • Electing corporate officers
  • Participating in required board of director meetings

The corporation's bylaws establish the specific duties of the board of directors as well as the procedures that the board must follow. At all times, the board of directors must act in good faith, with a reasonable degree of care, and without any conflicts of interest.

Liability of Directors

Generally, directors have latitude in making decisions on behalf of the corporation and stockholders to encourage growth. These decisions typically don't subject the directors to personal liability, even if a lousy business decision results. However, if a director violates a specific duty, causes certain financial harm to the corporation, acts in his or her self-interest, or commits a wrongful act or crime, then the director could face personal liability.

Most corporations offer officer and liability insurance coverage to protect directors from individual claims. As with all insurance, the policies govern and could contain certain exemptions or exclusions.

Stockholders

Stockholders, or shareholders, invested money in the business by purchasing a share of corporate ownership. As the corporation increases in value, the shares increase in proportionate value. By buying stock, the stockholder becomes a partial owner in the corporation.

Stockholders can benefit financially by receiving dividends from the shares, which is a portion of the corporation's profits, or from selling the shares for a profit. Additionally, stockholders can influence the management of the corporation, depending on how many shares they own.

Stockholders typically are not liable for a corporation's debts, unless the stockholders committed fraud. Then, the stockholders could be held personally responsible through "piercing the corporate veil."

By purchasing corporate shares as a stockholder, you are afforded certain rights. However, if you're a stockholder in a private company versus a public company, your rights differ. Some fundamental rights that all stockholders are entitled to, for example, are the right to vote for major corporate decisions, the right to examine corporate records, and the right to file a lawsuit against the corporation for bad acts of the officers and directors.

Corporate Governance and Formation

Although some basic rules are the same for corporate directors and stockholders, the rules can vary depending upon whether your company is public or private, the size of your company, and where you are located. State laws govern corporations, so the laws affecting directors and stockholders also vary by state.

Whether you're initially incorporating or making changes to your governance, it may be helpful to consult an online service provider or attorney. Seeking the assistance of a business attorney or legal service provider often allows you to better understand the law and your options as a business owner or director.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.