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Shareholders, Officers, DIrectors, What's the Difference?

Q: I think I’m ready to start a corporation, but I’m a little confused on something. I know that companies have directors, officers and shareholders, but what exactly is the difference?

There are three groups with responsibility in any corporation- directors, officers and shareholders. Shareholders and directors can act only as groups. That is to say that individual shareholders or and individual directors have no power to do anything. So, whatever shareholders do, they do as a group and the same thing goes for directors. This is one of the reasons that there are statutory rules in each state that govern when a quorum is present at meetings and what vote is required.

Of course, by having those requirements, statutes assume that a corporation will have multiple shareholders and directors, which sometimes is not the case. Requirements for quorum and minimum vote requirements only make sense if there are a number of individuals involved. But in many cases a corporation may only have one individual shareholder and one director.

Officers, meanwhile, do not operate in groups. Individual officers- like president, secretary and treasurer- are agents of the corporation. As agents, they may have authority to act on behalf of the corporation in an individual capacity. For example, they may be able to bind the corporation to contracts or speak on behalf of the corporation in various ways, like determining who to delegate hiring authority.

Statutes are written with some general assumptions in mind. One of those is that the shareholders are the owners of the corporation. As such, they elect the board of directors. The directors technically “manage” the corporation, which is to say that they make the business decisions. One of those decisions is to hire and fire officers who are charged with carrying out the board of director’s directions. Directors can delegate a great deal of authority to officers to act as the agents of the corporation in its day to day operations.

Q: Are corporations required to have all three? What if I’m starting the company by myself?

All corporations have shareholders (whether a single individual, another company, or multiple different people or entities). As a general rule it’s a good idea to form a corporation with the mindset that all three roles are required. In reality, there may be times that certain roles are not required or may overlap with others. As with everything in the law, the state in which the corporation is based has a substantial effect on what roles are required and how they interact with each other. Further, there are typically methods of bypassing the statutory requirements in the articles of incorporation and bylaws. With that said, the general rules in a few states are as follows:

Illinois:

An Illinois corporation must have one or more directors, and the number may be fixed in the bylaws or articles of incorporation (805 ILCS 5/8.10).  Like many states, an Illinois corporation shall have the officers which are provided in the bylaws. This means that the number could be 10 and it could be 0. Corporations have the freedom to set the number and duties however they deem appropriate (805 ILCS 5/8.50).

Minnesota:

Like Illinois, Minnesota corporations must have at least one director, but may have more if permitted by the articles of incorporation or bylaws (Min. Stat 302A.203). What is different in Minnesota is the requirement that corporations have officers.  Minnesota corporations must have at least one person exercising the function of a chief executive officer and chief financial officer.  Additional officers may be provided for in the bylaws or by election of the board (Min. Stat 302A.301).

Wisconsin:

In Wisconsin, a corporation must have at least 1 director, unless it elects to be treated as a statutory close corporation, which is beyond the scope of this post. But essentially it is a mechanism that most state statutes permit that allows a corporation, by making that election, to be governed by its shareholders and not a board of directors. The number of directors may be increased in the articles of incorporation or bylaws of the corporation. (Wis. Stat. 180.0803).  A Wisconsin corporation shall only have those officers described in the bylaws or appointed by the board of directors. That means that a corporation may have no officers or practically any other number. (Wis Stat. 180.0840).

One person can wear more than one hat at a time. In the case of a corporation being started by a single individual, there may be only one shareholder. That shareholder may also be the sole director as well as an officer (or all officers for that matter) at the same time. This is actually fairly common with small businesses just starting out, but it’s important to remember that even though the same person is serving in every role, each role has very different responsibilities. It’s important not to confuse those responsibilities and always be sure which hat the individual is wearing- whether it is that of shareholder, director or officer.  Just because state corporation statutes envision three distinct groups of actors doesn’t mean that they are necessarily different people.

Michael F. Brennan is an attorney at the Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached at michael.brennan@mfblegal.com with questions or comments, or check out his website at www.thevirtualattorney.com.

The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.

By Michael Brennan

 

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