What’s the Difference Between Corporate Shareholders, Board of Directors, and Officers?
If you own any type of corporation, there are three roles that need to be filled: shareholders, board of directors, and officers. If it’s a small business, the same people — or even just one person — can hold all three roles. But the roles can also be held by different people.
Even if the same people are filling all three roles, the roles need to function separately both in practice and in writing in order for your corporation to properly maintain its limited liability protection. Let’s break down each.
“Shareholder” is just the legal word for owner of a corporation. Shareholders on their own actually have fairly limited rights and responsibilities. Their main role is to participate in any required shareholder meetings (usually once a year, but sometimes more, depending on what your bylaws say). At this meeting, their main role is to elect the board of directors. Your bylaws might also give your shareholders additional rights, such as the right to amend the bylaws, or vote on things that they normally wouldn’t have the right to vote on by default. Shareholders have a limited right to certain financial information, and they have the right to sue the company under certain circumstances, if they feel that the people running the company aren’t fulfilling their legal obligations. Finally, of course, shareholders may collect dividends, to benefit from the success of the business.
- Board of Directors
The board of directors is responsible for making all of the business decisions that are outside of the normal day-to-day decisions. These decisions might include things like electing s-corporation tax status, hiring key employees, amending the bylaws, or changing banks. The board of directors also must hold at least annual meetings. One of their main roles at this meeting is to elect the officers. Directors may or may not be paid for their participation on the board. The required number of board members may change depending on how many shareholders your company has.
Officers are the people, usually owners or employees, who run the day to day operations of the business. They are empowered to make daily decisions, such as stocking inventory, dealing with customers, and paying vendors without the participation of the board. Officer roles include President/CEO, Treasurer/CFO, and Secretary. These roles are mandatory in California, but may be held by the same person/people, and may depend on how many shareholders your company has. Officers are usually paid a salary or by the hour, as company employees.
Even though these roles may be held simultaneously by the same person, it is important that you, as an owner/director/officer keep these roles separate in your mind and in your actions. Even if it’s just you running everything, you’re still required to hold a shareholder meeting where you elect your board, hold a board meeting where you elect your officers, keep formal records and meeting minutes, and take the roles seriously. Failure to do so may result in you losing your limited liability, which is the reason why you formed your corporation to begin with!
These roles should be described in detail in your company bylaws. Your bylaws should include the requirements for who can hold each role, how often and when to hold meetings, and most importantly, your bylaws should be very specific about which decisions belong to which role.
Make sure you’re protecting yourself and your limited liability! Contact us to verify you’re treating all three roles appropriately, and to ensure your bylaws are detailed and tailored to your specific business.
Photo by Thomas Drouault on Unsplash