Many family-owned businesses are organized as corporations to protect the owners from personal liability for business obligations. One consequence of organizing as a corporation is the legal separation of ownership and management. In order to secure protection from personal liability and to assure effective corporate governance, it is important for family-owned businesses to manage the inherent overlap that exists in their ownership and management. This blog post provides an overview of the different legal roles played by shareholders, directors and officers.
Stockholders are individuals or entities that hold an ownership interest in a corporation. The ownership interest is represented by shares of stock. An ownership interest does not, however, give a stockholder the right to control the day-to-day affairs of the corporation. Typically, the most important right that a stockholder has is the right to vote. Voting rights provide stockholders with limited control over the corporation’s affairs by allowing them to, for example, elect the individuals that will serve on the corporation’s board of directors and approve the corporation’s bylaws. Stockholders exercise their right to vote at annual meetings or special meetings that are called by the corporation. Stockholder’s voting rights are subject to the terms and conditions set forth in the corporation’s organizational documents (i.e., articles of incorporation and bylaws) and other agreements between some or all of the stockholders.
The board of directors of the corporation is made up of members who are elected or appointed by the stockholders. Membership on the board is not usually limited to stockholders or employees of the corporation. Directors govern the corporation on behalf of the stockholders and owe fiduciary duties to the stockholders and the corporation. The board of directors’ duties usually include hiring and dismissing the corporation’s officers, establishing and assessing the overall direction and strategy of the corporation, and approving annual budgets and corporate policies.
Officers are appointed and removed by the board of directors. Officers manage the day-to-day affairs of the corporation and carry out the policies adopted by the board of directors. The structure of management varies widely between corporations. In many instances a single individual may serve in multiple offices. For example, many boards of directors choose to have the top manager serve as both the president and CEO of the corporation.
With this background, it is important for family business owners to review the roles that various individuals are playing within the corporation. Over time, as a business grows and develops, changes may begin to occur organically, and corporations must consider what corresponding legal formalities need to be observed to keep pace.