Corporate Officer Definition: Everything You Need to Know
The corporate officer is an individual who is responsible for a business's day-to-day operations. Most corporation members are in at least one of three categories: shareholders, directors, and officers. 3 min read
2. Board of Directors
3. Officer and Employee Distinction
4. Reasonable Compensation
The corporate officer is an individual who is responsible for a business's day-to-day operations. Most corporation members are in at least one of three categories: shareholders, directors, and officers. The shareholders invest in the business in the hopes of a financial return on this investment, and the directors oversee the corporation's affairs and strive to protect shareholder interests.
Overview of Corporate Officers
Corporate officers are high-level management executives hired by the business's owner or board of directors. Examples include the organization's chief executive officer (CEO), chief financial officer (CFO), treasurer, president, vice president, and secretary. Officers can also be shareholders and directors but don't necessarily have to be. They have the authority to act on behalf of the corporation, including contract authority. A corporation can have any number of officers and an individual can hold any number of offices. In fact, in small corporations, the same person may hold every office.
An officer can be terminated by the board of directors at any time, though whether it must be done for cause and the number of votes needed for removal vary depending on company bylaws. If an officer resigns, the company is still responsible for prior contractual obligations entered into by that person.
Board of Directors
The corporation identifies the board of directors and names these individuals in its bylaws or articles of incorporation. Once the corporation is operational, new directors may be elected by shareholders at the annual meeting after serving a specified term. The board of directors is legally responsible for the corporation's actions and for its officers, agents, employees, and subsidiaries. The responsibilities of a corporate director typically include the following:
- Using the concept of duty of care to always act in the best interests of a corporation.
- Serving the corporation and its shareholders with loyalty.
- Participating in board of director meetings.
- Approving specific transactions and actions of the business, such as agreements, contracts, new corporate officer election, sales and purchases of assets, and approval of policies.
- Amending the corporation's articles of incorporation or bylaws when necessary.
The number of directors is identified in the corporation's founding documents and largely depends on the size of the business. When a corporation has more than one director, it should have an odd number for voting purposes.
Officer and Employee Distinction
Most companies don't distinguish between an employee and an officer. While some officers are not considered employees, it's important to make this distinction before assigning these categorizations since tax and legal complications can ensue.
Officers can be replaced or fired by the corporation directors, and additional officers can also be appointed. This can be confusing since a vice president could be either an employee-officer or simply an employee with a lofty title.
In the view of the IRS, anyone who does work for the company, including officers, is considered an employee. Officers who do not work on behalf of the company and simply collect distribution profits are not considered employees. This is especially important to note for S corporations, since they can get in trouble for failing to pay wages to employee-officers, opting instead to pay them higher distributions. Wages are subject to payroll taxes while profit distributions are not. Choosing the wrong classification for an officer can result in an audit.
When officers conduct administrative duties, their liability is increased. For example, a treasurer who is supposed to handle financial oversight and policy may also take on day-to-day responsibilities, such as paying taxes and bills. If taxes are not paid correctly or bills are past due, he or she could be held personally liable.
In some cases, corporations have failed to indemnify employees, arguing that their titles are merely for show and not reflective of actual duties.
For an S corporation, an officer must be paid a reasonable salary for the duties he or she performs before profits are distributed. This salary can be justified by industry norms and cannot be simply a token amount to avoid payroll taxes. If the IRS does not agree that the compensation provided to an officer is reasonable, he or she may be required to have past distributions reclassified as wages, thus subject to payroll tax.
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