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Types of Companies > C-Corporation (Stock) > Management Structure

Corporate Management Structure

Corporations are managed by a board of directors The directors are responsible for making major business decisions and providing oversight of the hired management team. In smaller corporations the directors are the owner/management team. No matter the size of the organization, oversight of the corporation is the prime responsibility of the board of directors. Often board members are external to the organization meaning that they may be neither a shareholder nor employee of the firm. External board members may provide invaluable objective advice because they bring to the board fresh perspectives and management skills.

Directors are elected by the stockholders of the corporation. Officers are employees of the firm who run the day-to-day operations of the corporation, and are appointed by the directors.

Corporations are required to hold at least one annual meeting of shareholders to elect directors. The minutes of these meetings must be carefully maintained by the corporation. If the corporation has only one or a few stockholders, it may make sense to hold the meetings by conference call, or simply by having the stockholders sign a statement indicating what actions are approved.

The Board of Directors

A corporation is managed by the board of directors, which must approve major business decisions. The articles of incorporation or its bylaws will determine how many directors will be elected and what shall constitute a quorum for a valid vote to be taken on an issue. Directors may, but are not required to be, either a shareholder or an officer. Directors are elected by the shareholders and typically serve for a limited term. Corporations must have at least one director.

Examples of procedures which must be approved by the board of directors include:

• Declaring a dividend,
• Electing officers and setting the terms of their employment,
• Amending bylaws or the articles of incorporation,
• Any corporate merger, reorganization or other significant corporate transaction.

Directors of a corporation have a fiduciary duty to the corporation. They are legally obligated to act with loyalty and care to the corporation. Generally, means that directors must act in good faith, prudently, and in the best interest of the corporation.

Officers:

Officers are appointed by the board of directors to run the day-to-day operations of the corporation. A corporation must have at least three officers: (1) a president, (2) a treasurer or chief financial officer and (3) a secretary. Officers do not have to be stockholders or directors, but they can be. There is no limit on the maximum number of officers, and no limit on the number of offices that a person may hold. It is possible the same person may hold all offices.

Officer compensation is determined by the directors and many boards include company stock as part of the executive compensation package. Stock options that accrue at certain periods of time (vesting) help to create an incentive among hired officers to maximize long profitability rather than focusing only on immediate returns. Directors understand that tying pay to long term performance reduces the chance of overly risky operational maneuvers by officers to make their annual performance numbers "look good" by creating long term detrimental effects because of their decisions.

Stockholders are the ultimate owners of a corporation. They have the right to elect directors, vote on major corporate actions (such as mergers) and share in the profits of the corporation. However, stockholders do not have the right to direct the day-to-day operations of the corporation.

Tax Issues Affecting Corporations

The primary disadvantage of a traditional corporation is double taxation. A traditional corporation, known as a "C-corporation," pays a corporate tax on its corporate income (the first tax). Then, when the C-corporation distributes profits to its stockholders, the stockholders pay income tax on those dividends (the second tax).

To avoid double taxation, corporations can make a special election to be taxed as a pass-through entity, like a partnership or a sole proprietorship. In other words, there is only one level of taxation. The corporate profits "pass through" to the owners, who pay taxes on the profits at their individual tax rates. Corporations that make this tax election are known as "S-corporations." Corporations that elect the S-corporation status are usually small closely held firms with no plans for seeking large amounts of equity capital.

Some states also have a state corporate income tax. Corporations that anticipate a tax liability of $500 or more must estimate their taxes and make quarterly estimated tax payments. Corporations with employees are required to pay federal (and sometimes state) payroll taxes.

Ownership restrictions for S-corporations:

S-corporations cannot have more than 75 stockholders, and each stockholder must be an individual who is a resident or citizen of the United States. Also, it is difficult to place shares of an S-corporation into a living trust.

 

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