Corporate Structure: Everything You Need to Know
Corporate structure is a way of organizing a company in three parts; Board of Directors, Corporate Officers, and Shareholders. 6 min read
2. Corporate Structure: What Is It?
3. Why Is Corporate Structure Important?
4. Reasons to Consider Using a Corporate Structure
5. Reasons to Consider Not Using a Corporate Structure
6. Frequently Asked Questions
7. Steps to Establish a Corporate Structure
What Is Corporate Structure?
Corporate structure is a way of organizing a company in three parts. This includes:
- Board of directors, who control the business
- Corporate officers, who oversee operations
- Shareholders, who own the business
Corporate Structure: What Is It?
Also known as corporate governance, corporate structure is the way of running a business. Corporate structures include:
Board of Directors
The board of directors reports to the shareholders. The board's tasks include:
- Making sure managers are effective
- Keeping the chief executive officer (CEO) on track
- Reviewing the company's plans, budgets, and goals
- Ensuring the business follows the law
- Writing bylaws
- Creating committees
- Protecting shareholders
- Holding annual meetings
The board can be one or many people with diverse experience. Shareholders elect board members. The company's bylaws will say how many members the board needs. Usually, the board of directors has an odd number of members to avoid tied votes.
Members' personal assets are separate from business assets. However, they are still responsible for business debts. They are also responsible for the corporation, its officers, agents, employees, and subsidiaries.
Directors may include:
- Chairman: This person leads the business and is responsible for the board's actions. They work with top officers. He or she acts as the public face of the company. Usually, the chairman starts as a board member.
- Inside Directors: These people are in charge of budgets. They may be shareholders or top managers. Sometimes they are called executive directors.
- Outside Directors: These people have the same responsibilities as inside directors, but they are not officers or managers. They offer unbiased opinions.
Corporate officers are chosen by the board. They are also called upper management. Officers handle day-to-day tasks. They look out for the company's interests.
There are four kinds of officers:
- President or CEO: This officer enforces policy, signs documents, and works with the board of directors. They may also be the president. CEOs enforce decisions.
- Vice President or Chief Operations Officer (COO): This officer is a senior executive. VPs replace the president if he or she can no longer act as president. COOs run the daily business, marketing, production, sales, and staff.
- Treasurer or Chief Financial Officer (CFO): This officer is in charge of finances. The CFO writes budgets, and tracks spending, and writes reports. Most CFOs give reports to the board, the Securities and Exchange Commission (SEC), and other agencies.
- Secretary: This officer keeps records, minutes, and books.
Shareholders own the company. They don't typically take part in daily business. Different kinds of corporations have different numbers of shareholders. S corporations, or s-corps, usually have fewer than 100. C corporations, or c-corps, may have many more than that.
A corporation may have several shareholders. Each owns a part of the company. Owning more of the business gives a shareholder more power.
These people own common stock shares. They get a return from the company in the form of profits. Shareholders are not personally liable for the company.
Shareholders help make decisions. Those who own more shares have more interest in the company. While a corporation's owners are usually its first shareholders, larger companies can have many public shareholders.
Shareholders can vote on:
- Members of the board of directors
- Changing bylaws or the Articles of Incorporation
- Dissolving or merging the company with another
- Disposing of assets
Why Is Corporate Structure Important?
Corporate structure separates owners and managers. Clear structure can grow a small family business into an international company that's traded around the world.
A well-defined structure helps a business shape its goals. Corporate structure is useful for startups because it helps them to outline positions and responsibilities. This can also attract investors who easily understand how a company plans to make profits.
Reasons to Consider Using a Corporate Structure
- You want a traditional hierarchy. This clear structure allows the most talented people to take on the most powerful roles in a company. Officers can carry out operations, and shareholders have a say in decisions.
- You want a clear separation of corporate roles. When looking at the health of a company, experts look for clear roles for board members and executives. For instance, experts suggest keeping the CEO and chairman roles separate. They also look for a balance between kinds of board members.
Reasons to Consider Not Using a Corporate Structure
- You want a more democratic structure. Consider a limited liability company (LLC) instead. Members own LLCs and help make every decision. LLCs may appoint a manager to oversee daily tasks so members can step back from managing.
- You want a decentralized structure. Consider the sharing economy. These companies use a blockchain, or a distributed database, where information is not tied to a single place or processor. They are often community-focused.
- You want a flat structure. Traditional corporate structures don't always work for more innovative companies or startups that hire a lot of millennials. Consider a flat structure with a social focus. A flat structure brings in diverse opinions through collaboration.
Frequently Asked Questions
- Can one person fill all roles in a corporate structure?
Many states allow a single person to carry out each role in the corporate structure. However, your corporation may need more than one board member if you have more than one shareholder. Check with your Secretary of State to learn more.
- Who else is part of a corporation?
Employees aren't usually considered part of the corporate structure, but they are an important part of any organization. Employees do day-to-day tasks and help the company reach its goals. They report to the corporate officers.
- Is corporate structure the same as business type?
- Sole Proprietorship: These are owned and operated by a single person who is liable for the company. If they do business under an assumed name, they must register it with their Secretary of State.
Sole proprietors file a Schedule C with their Form 1040. Tey report profits and losses on their personal tax returns. They must also file a Schedule SE, which calculates self-employment taxes. If they expect to owe at least $1,000 in federal taxes, they must make estimated tax payments each quarter.
Business losses can offset income that sole proprietors earn elsewhere. Sole proprietors often rely on personal savings and assets because they may have a hard time raising money or getting loans.
- Partnership: These have two or more owners. Partners report profits and losses on Form 1065 and Schedule K-1 on their personal tax returns.
General partnerships rely on partners to manage the business and assume personal liability for debts. Partners can take out loans and make business decisions.
Limited partnerships include general partners and limited partners who have less personal liability and control over the company. Limited partnerships take more paperwork but are ideal for companies with passive investors.
- Limited Liability Partnership (LLP):
LLPs give general partners limited personal liability. This is ideal for professional partnerships because each partner is responsible for their own activity.
- Limited Liability Company (LLC):
LLCs combine corporations and partnerships to offer personal liability protection without as many rules and requirements that corporations follow. LLCs can have any number of shareholders. Members and managers can take part in business operations.
These businesses don't run indefinitely. Some have a limited life or end when a member retires, leaves, or dies. To create an LLC, owners must file articles of organization and an operating agreement with the Secretary of State. Rules for LLCs are different in each state, so owners should prepare for this if plan to operate do business in more than one state.
Corporations exist separately from their owners. They must follow many rules and state laws. Corporate assets are separate from the owners' assets. Owners are not responsible for business debts or judgments.
Corporations can be private, public, or municipal. They may operate indefinitely. They can keep some profits without being taxed, and they can raise money by selling stock.
Corporations are often taxed twice: once on the business side and once on the shareholder's side. Some companies get around this by paying salaries instead of dividends.
- S Corporation:
This is ideal for small business owners. S-corps offer personal liability protection. They allow owners to report profits and losses on their personal tax returns.
S-corp owners can use simple cash-based accounting. They can have up to 100 shareholders and one kind of stock. They file articles of incorporation, hold annual meetings, record minutes, and let shareholders vote. Only individuals, estates, some trusts, and tax-exempt organizations can own stock in s-corps.
Steps to Establish a Corporate Structure
- Write your corporation's Articles of Incorporation and bylaws.
- Find shareholders.
- Create a board of directors.
- Appoint corporate officers and assign titles.
If you need help establishing a corporate structure, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.