Key Takeaways:

  • Corporations are distinct legal entities, separating ownership from management and liability.
  • Shareholders are owners through stock ownership but lack involvement in daily operations.
  • Corporate governance relies on a board of directors elected by shareholders to make decisions.
  • Shareholders' rights include voting, receiving dividends, and inspecting records, with variations among common, preferred, and beneficial shareholders.
  • Ownership structure and rights are defined in the articles of incorporation and can vary by state.
  • UpCounsel offers expert assistance in navigating corporate formation and ownership complexities.

If you want to know who legally owns a corporation, you can search through various public records to identify the owner(s) of a business. Specifically, a corporation is a type of legal business structure that requires several ongoing corporate formalities along with complex tax rules.

Corporation: An Overview

All states recognize a corporation as a distinct legal entity, meaning that it operates separately from its owners. A benefit of this is that the owners of a corporation can’t be held personally liable for any business debts, which is one of the biggest advantages of operating a corporation. When it comes to forming this type of legal business structure, most states require you to file the articles of incorporation, or something similarly named, with the Secretary of State. After you complete the necessary steps for forming your corporation, you might find people asking, “Who owns your corporation?” Believe it or not, this is a common question among such businesses, particularly due to the fact that a corporation can consist of one shareholder or hundreds of thousands of shareholders.

But who really owns the business? This answer depends on the state in which you choose to incorporate. Some might argue that the shareholders own the corporation because they have a vested interest in the corporation through shares, voting rights, and other ownership qualities. However, others might argue that a corporation can’t be owned since it operates as a separate legal entity from the shareholders.

Formation of a Corporation and State Laws

When forming a corporation, the company must file articles of incorporation with the state where it intends to do business. This legal document outlines the corporation's essential details, such as its name, the number of shares it can issue, and the structure of its board of directors. State laws vary and can influence the nature of corporate ownership, as they provide the legal framework for the corporation's operation. For example, Delaware is known for its business-friendly laws, which is why many companies choose to incorporate there. It’s important to consider how the state's laws will impact the corporation's structure, ownership rights, and requirements.

Why Choose a Specific State for Incorporation?

Selecting the right state for incorporation can significantly impact corporate governance, taxation, and ownership rights. For example, Delaware is favored by many businesses due to its flexible corporate laws and business-friendly courts. Other states, such as Nevada and Wyoming, offer benefits like lower taxes and heightened privacy for shareholders. Before incorporating, it’s crucial to assess factors such as tax obligations, legal protections for officers and directors, and ongoing reporting requirements.

Shareholder: Defined

A shareholder is someone who owns shares in a corporation. Generally, corporations are owned by several shareholders. For example, Google is a publicly traded corporation with almost half a million shareholders. Other corporations are closely held, meaning that there are only a few shareholders.

Different Types of Shareholders

While shareholders are typically seen as owners of a corporation, not all shareholders hold the same rights. Shareholders can generally be categorized as common shareholders and preferred shareholders:

  • Common Shareholders: Hold voting rights and can influence the corporation’s direction by electing the board of directors. They are entitled to dividends but receive them only after preferred shareholders are paid.
  • Preferred Shareholders: Typically do not have voting rights, but they have a higher claim on assets and earnings. In case of liquidation, preferred shareholders are paid out before common shareholders.
  • Beneficial Owners: A beneficial owner is the individual or entity that ultimately enjoys the benefits of ownership, even if the stock is held in another name. For example, shares held in trust by a broker for a client are legally owned by the broker, but the client is the beneficial owner.

The Role of Institutional Shareholders

Institutional shareholders, such as mutual funds, pension funds, and hedge funds, often own significant portions of publicly traded corporations. While these entities do not engage in daily operations, their voting power and investment strategies can influence corporate policies. Institutional investors typically focus on maximizing shareholder value and may advocate for changes in management or operations to achieve this goal.

Corporate Ownership

While an argument can be made that corporations can’t truly be owned, it is widely agreed upon that the shareholders of the corporation are owners, but not legal owners. Legal ownership means having the ability to make actual business decisions or use the company’s assets. The shareholders aren’t the actual true owners of the business. While they aren’t legal owners, they are still considered owners due to their ownership in stock.

Such ownership will depend on the percentage of shares that each person carries in the corporation. For example, someone who holds 51% of the shares in a corporation owns a controlling interest in it; therefore, he or she has greater voting and other decision-making power.

The shareholders have the following rights:

  1. The right to receive a portion of the corporation’s net revenue
  2. The right to vote on the board of directors
  3. The right to inspect corporate records
  4. The right to sue for wrongful acts committed by the board, i.e., breach of fiduciary duty, fraud, illegal conduct
  5. The right to sell their stock
  6. The right to dividends
  7. The right to purchase more stock if another public offering is made

With regard to the second right, all shareholders have a right to vote for who will be on the board, giving them some sort of oversight as to how the business will be run, as they run the company for the benefit of the shareholders. Additionally, as noted above, if a shareholder owns a significant amount of shares in the business (i.e., 51%), then he or she might even be able to appoint the board alone.

If a shareholder wants to sell his stock to another person, but still holds beneficial ownership over the shares, he can do so by turning over the rights to his shares without turning over title. If this occurs, the third party will be the registered owner of the stock, but there is a document that will specify the original shareholder as the true holder of the shares. This also means that the original shareholder will continue to have the above-mentioned rights as all other shareholders.

Public vs. Private Ownership Structure

Corporate ownership structures vary widely between public and private companies. Public corporations issue shares that trade on stock exchanges, making ownership accessible to individual and institutional investors. Private corporations, however, limit share ownership to a select group, such as family members or a small number of investors. These distinctions affect transparency requirements, reporting obligations, and shareholder rights. Public companies are subject to rigorous regulations, including periodic financial disclosures, while private companies enjoy more operational flexibility.

Role of the Articles of Incorporation in Ownership

The articles of incorporation play a vital role in defining who owns a corporation. This document, filed with the state, specifies the number of shares the corporation is authorized to issue, which directly impacts ownership distribution. By detailing the corporation’s structure, voting rights, and stock issuance, the articles set the stage for corporate governance and ownership. It’s essential for shareholders and potential investors to review the articles of incorporation to understand their rights and the corporate structure. Amendments to the articles can alter the ownership dynamics, such as authorizing additional shares to raise capital.

Amending Articles of Incorporation

The articles of incorporation can be amended to reflect changes in corporate ownership, governance, or structure. For example, a corporation may authorize additional shares to raise capital or adjust voting rights to accommodate new classes of stock. Such amendments typically require shareholder approval and must comply with state laws. Understanding the amendment process is essential for shareholders and directors seeking to adapt the corporation to evolving business needs.

Board of Directors

While the shareholders are termed “owners” in a corporation, the board of directors make the business decisions for the corporation. Keep in mind that anyone sitting on the board doesn’t necessarily have to own any shares in the business.

Ownership Rights and Limitations

Shareholders are often referred to as the "owners" of a corporation because of their stock ownership. However, their rights are subject to limitations:

  1. Decision-Making Power: Shareholders have limited involvement in the corporation's day-to-day operations. Their primary influence is exercised through voting rights, where they elect the board of directors to oversee management.
  2. Transferability of Shares: One of the key characteristics of corporate ownership is the ability to buy, sell, or transfer shares without affecting the corporation’s continuity.
  3. Limited Liability: Shareholders are not personally liable for the corporation's debts. Their financial risk is limited to their investment in the corporation's stock.
  4. Beneficial Ownership: Shareholders can maintain beneficial ownership without direct title to the shares. This occurs when a third party holds the stock in their name, such as a broker or trustee, while the original shareholder retains ownership benefits.

The Impact of Dual-Class Share Structures

Frequently Asked Questions:

1. Can one person own an entire corporation?Yes, a single individual can own 100% of a corporation by holding all its shares, often referred to as a closely held corporation.

2. How does a shareholder exercise their voting rights?Shareholders vote at annual or special meetings, either in person or by proxy, on matters such as electing directors and approving major corporate changes.

3. What happens if a shareholder owns more than 50% of a corporation?A majority shareholder has controlling interest, enabling significant influence over board decisions and corporate policies.

4. Are shareholders liable for corporate debts?No, shareholders enjoy limited liability, meaning their personal assets are protected, and their financial risk is limited to their investment in the corporation’s stock.

5. How can I verify the ownership of a corporation?Ownership details are often recorded in the corporation’s stock ledger or can be obtained through public filings with the Secretary of State or similar regulatory bodies.

Dual-class share structures grant different voting rights to shareholders, often giving founders or executives greater control over the corporation. For instance, one class of shares may carry ten votes per share, while another class offers one vote per share. This setup allows founders to retain decision-making authority while raising capital through additional shareholders. While common in tech startups, dual-class structures can limit the influence of minority shareholders.

If you need help learning more about corporate ownership, or if you need help forming your corporation, 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.