Does a Corporation Really Need a Board of Directors?

By Dennis Masino

A corporation's structure is more complex than a sole proprietorship or partnership, but it offers protection to its owners from personal liability for business debts and obligations. The three groups that make up the structure of a corporation are the shareholders, directors and officers. Under certain circumstances, the directors' role can be eliminated and taken over by the shareholders.

Formation

Laws in each state authorize the formation of corporations. Once formed, a corporation is a legal entity with the ability to sue and be sued in its own name apart from the shareholders. Formation of a corporation is accomplished by selecting a name and filing a certification of incorporation with the state. Forms to help you do this are available through an online legal document provider.

Structure

The shareholders are the owners whose investment of money in the corporation entitles them to receive dividends when the business earns a profit. Shareholders do not manage or take part in the operation of the business. That role is left to the board of directors and the officers.The board of directors sets corporate policy and direction, but it does not handle the day-to-day operations of the business. Daily operations of the corporation are handled by the officers who are appointed by the board of directors. Common titles held by officers are president, vice president, treasurer and secretary.

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Board of Directors

The directors of a corporation are elected by the shareholders. It is not unusual, and not prohibited by state laws, for a small corporation to have one or more shareholders who are also officers and directors. Directors of a corporation act in a fiduciary capacity in that they must act in the best interests of the shareholders and the corporation above all others, including themselves.

Eliminating the Board

Some state corporation laws allow a corporation to operate without a board of directors. For that to occur, all the shareholders must agree, in writing, to assume the duties of the board of directors in managing the affairs of the corporation. Eliminating the board of directors works best if there is only a small number of shareholders. Having too many shareholders makes it difficult for the owners to manage the business.

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References

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