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When businesses are new, a few people may wear several hats. The owners may be the shareholders, directors, and officers. As those businesses grow, they sometimes grapple with how to define the roles and responsibilities of new staff and advisors. Entrepreneurs should keep clear the roles of shareholders, directors, and officers as they decide what role a new key person should fill.
Shareholders own the corporation. Shareholders often purchase their shares, thereby providing capital to the company. If a corporation observes proper corporate governance formalities, shareholders generally will not be held responsible for the corporation’s liabilities. Shareholders are not paid a salary; rather, their shares may have economic value. For instance, the company may issue dividends or distribute cash upon its dissolution, based upon the number of shares that are owned by shareholders.
Shareholders have the right to vote on certain key events. These include the election of directors, amendment of the corporation’s articles of incorporation, the sale of all or substantially all of the corporation’s assets, a merger into another corporation, and the corporation’s dissolution. Sometimes shareholders are given additional rights and obligations. These rights are documented in amended articles of incorporation or agreements between the shareholders and company.
Directors manage the affairs of the corporation. They are responsible for making decisions on material transactions and policies, which may include the appointment of officers and determination of compensation, the management of funds, and the approval of material contracts.
California imposes fiduciary duties on directors to act in good faith and in the best interests of the corporation and its shareholders. Directors are required to use reasonable inquiry when managing the corporation’s affairs. If directors are diligent in their decision-making and do not allow conflicts of interest or fraud to subordinate the interests to the corporation, they generally will be shielded from liability, even if their decisions have negative results.
Directors may or may not receive compensation. They may receive shares, in which case they are also shareholders. They may receive cash or other compensation in exchange for their service. They may also be volunteers who do not receive any payment for their service.
Officers manage the day-to-day operations. Directors appoint officers and delegate management functions to those officers. California requires corporations to have a chairman of the board or a president, a secretary, and a chief financial officer. Officers are generally compensated with salary, bonuses, and stock options, and have the power to hire the company’s other employees.
Entrepreneurs should keep these roles and responsibilities in mind as they integrate new investors, partners, advisors, and employees.
This article is provided for general education purposes. Please check with a legal or tax advisor for legal or tax advice.
For more info or to contact Delida Costin: Send an email to syobexaminer@gmail.com or visit www.costinlegal.com.
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