What is a Corporation?

Walmart, McDonald's, and Apple - all of these entities can be legally described as corporations. But what is a corporation exactly?

Most people can give many examples of what a corporation is, but if you ask them to describe what makes up a corporation you may get a confused look. A person likely knows words associated with corporations such as Shareholders or president but may not know how these terms practically relate to a corporation. This article will explain what a corporation is by examining the three main controlling entities that make up a corporation; the Shareholders, Directors, and Officers. By unpacking the basic aspects of a corporation this article seeks to provide a clearer understanding of what exactly is a corporation.

Corporations are hierarchical in nature with three levels of control. The first and theoretically most powerful aspect of a corporation is the Shareholders. Shares are certificates that equate to ownership in a corporation, and the owners of the shares are Shareholders. Corporations can have different classes of shares, and each class has different powers associated with them. For example, shares can be voting or non-voting in nature. Shareholders with voting shares can vote and make decisions for the corporation, such as electing Directors. On the other hand, non-voting Shareholders are silent investors and do not have the ability to vote on corporate decisions.

While theoretically Shareholders are the most powerful entity in the corporate structure, it is not always the case. Shareholders’ responsibilities are the big picture issues, such as whether it should be sold or who should the CEO be. Shareholders do not have the ability to make individual decisions for a corporation. Those responsibilities are the Directors’ and the Officers’. As the Shareholders are the owners of the corporation, they elect the Directors.

Directors, while appointed by the Shareholders, often hold more practical power over the corporation. A corporation must have at least one Director who also must be at least 18 years old. Directors are elected by the Shareholders to make policy decisions for the corporation. The Directors are responsible for creating overarching strategies for the corporations. For the practical work of running the corporation, the Directors elect Officers. The Directors issue general instructions to the Officers whose job it is to ensure they are followed. For example, the Directors may decide that the corporation should expand its business. They would vote on what this means and inform the Officers of their decision. The Officers would then set out to accomplish this goal.

Directors ultimately owe a fiduciary responsibility to the business as a whole and not the Shareholders. What this means is that sometimes Directors have to go against the wishes of the Shareholders so long as they are operating on a good faith basis as to what is best for the corporation. However, in response the Shareholders could vote out the Director/Directors. While Directors make decisions for the corporation, they are not considered employees. This is what separates them from the Officers.

Officers are employees of the corporation but wield more power than your average employee. Some examples of Officers are the president, vice president, and chief executive Officer (CFO). Officers generally are employees of the corporation who enact policies and make the decisions that affect the corporation. This can include but is not limited to hiring, firing, marketing, payment structures, and contract negotiations to name a few. While elected by Directors and sometimes given vague instructions on policy or visions for the corporation, practically it is the Officers who run the corporation. Therefore, in a practical sense, Officers often are the most influential individuals in a corporation.

While this power structure sounds straightforward it gets complicated by the fact that Shareholders, Directors, and Officers do not have to be separate people. In fact, it is often the opposite. Officers are usually Shareholders and Directors in the corporation.

Corporations come in all shapes and sizes. Some like Apple are very large with millions of Shareholders and a very complex corporate structure. While others are simpler where there may be only one Shareholder who is also the sole Director and the sole employee of the corporation. Therefore, this article serves as merely an introduction to a corporation’s structure. If a reader wishes to know more or has questions regarding corporations, they should contact our office and one of our lawyers would be happy to assist.