by Brenda Speer
During my legal career I have formed numerous corporations for clients and I have served on many corporate boards. I realized recently that while my understanding of a corporation is second nature, the corporate structure is shrouded in mystery for most. As I was reciting the litany just the other day to a client, it occurred to me that although corporate basics are mundane to me, they obviously aren’t for others. Now your corporate curiosity can be sated, at least in part, with this blog post.
Let’s start at the very beginning with a definition from Black’s Law Dictionary:
cor·por·a·tion n an artificial person or legal entity created by or under the authority of the laws of a state or nation, composed, in some rare instances, of a single person and his successors, being the incumbents of a particular office, but ordinarily consisting of an association of numerous individuals. Such entity subsists as a body politic under a special denomination, which is regarded in law as having a personality and existence distinct from that of its several members, and which is, by the same authority, vested with the capacity of continuous succession, irrespective of changes in its membership, either in perpetuity or for a limited term of years, and of acting as a unit or single individual in matters relating to the common purpose of the association, within the scope of the powers and authorities conferred upon such bodies by law.
After reading that you may be wondering, What’s an artificial person? It is a legal construct that means although a corporation is not a flesh-and-blood natural person, such as us human beings, a corporation is recognized as an entity with its own existence separate and apart from the human beings that created the corporation. As a result, corporations can endure for forever, theoretically, and many have for decades and centuries.
If you like alliteration and mnemonics, you can keep the basic corporate concepts straight with the 5 Bs: Birth, Babysitting, Bucks, Brains and Brawn.
A corporate entity is formed by filing Articles of Incorporation with the applicable legal authority, typically the Secretary of State, of the state in which the corporation is incorporated. The Articles of Incorporation serve as the charter establishing the entity. Articles provide the birth, or creation, of the corporation.
After the corporation is formed, the Bylaws are adopted. Bylaws are the governance rules adopted by the corporation for the management and regulation of its internal affairs. The Bylaws provide for, among other things, the election of directors by the shareholders and the appointment of officers by the directors. Bylaws provide the babysitting, or governance, of the corporation.
Shareholders are the owners of shares of stock in the corporation. Shareholders are empowered to elect the Board of Directors and are entitled to dividends, their pro rata share of profit distribution, if any, from the corporation. Shareholders do not have power or authority to participate in the management of or to bind the corporation. Shareholders provide the bucks, or capital, of the corporation.
Directors are authorized to manage and direct the affairs of a corporation. They provide guidance, advice and oversight to the corporate operations. The Directors are empowered to determine and vote on the course of actions to be taken by the corporation and to appoint the Officers. Directors provide the brains, or strategy, of the corporation.
Officers are empowered to execute the operations of the corporation in a daily, hands-on management role. While Officers do have power to act on behalf of and bind the corporation, such as signing contracts, purchasing property and bringing and defending legal actions, they do not determine or vote on the course of actions to be taken by the corporation. Officers provide the brawn, or action, of the corporation.
Now you know the basics of corporate structure.
A few more tidbits and you’ll be dangerously knowledgeable enough to engage in boring, cocktail party chit-chat.
A corporation is a corporation, regardless of sub-type, and they are all set up and governed as outlined above.
However, a for-profit corporation type is a capitalist enterprise and has shareholders and distributes profits, if any, to the shareholders as a return on their investment in the corporation.
In contrast, a non-profit corporation type is a charitable enterprise (which may or may not make money, notwithstanding the nomenclature) and has members, instead of shareholders, and it does not distribute profits to the members, but rather the profits are retained in the organization to further its charitable purpose.
Depending on the purpose, served membership or constituency, Articles of Incorporation and Bylaws of the non-profit corporation, the members may or may not be empowered to elect directors. For example, in a non-profit corporation whose served members or constituents are minors (such as youth groups for life skills, music or sports), the members are typically non-voting and that power is taken on by the adult directors. Members, like shareholders, may provide bucks, such as dues or contributions to the corporation.
An S corporation or a C corporation sub-type is a tax status of a for-profit corporation with the Internal Revenue Service.
In an S corporation (which may apply to a for-profit corporation that meets certain qualifications, such as fewer than 100 shareholders), the corporate income, losses, deductions and credit are passed through to the shareholders and are assessed tax at the shareholders’ individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.
In a C corporation (which applies to a for-profit corporation that does not qualify as an S corporation), the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
In a 501 corporation (which may apply to a non-profit corporation that meets certain qualifications, and there are many variations of 501 status), the organization may be exempt from federal income taxation and in addition, charitable contributions made to some 501 organizations by individuals and corporations may be deductible.
© 2012 BL Speer & Associates