Basic Structure of a Business Corporation

Every week, I’ve encountered questions and confusions from many soon-to-be entrepreneurs, and sometimes even entrepreneurs who are running real companies, about power struggles among board of directors, officers and shareholders.

In general, board of directors exercise all the corporation powers except those reserved to the shareholders by statutes, articles of organization or bylaws. It means, business affairs of the corporation shall be managed under the direction of the board. Note the word “direction”. Board does not engage in day to day operation of the corporation, but only “directs”. The board members are elected by the shareholders. The number shall be fixed by the shareholders at the annual meeting. In Massachusetts, the number shall be at least one. If the corporation has more than one shareholder, the number of directors shall not be less than three.

The most basic structure of the officer team has a President, a Treasurer and a Clerk. President is in charge of the daily operation of the business. One would imagine a President has pretty broad authorities, but amazingly, his power is very limited and in most instances only has the authority to enter into routine transactions, unless he is also a Chief Executive Officer (CEO). Treasurer receives and disburses corporate funds. Clerk, also referred as Secretary, takes minutes of board and shareholder meetings and maintains corporate records and seal. All the officers are elected and removed by the board and fulfill their duties at the direction of the board. The scope of their authority shall be enumerated in the bylaws.

Shareholders are the owners of the corporation. They have the right to elect and remove board members, which is a right sometimes shared with the board itself. Shareholders have the right to inspect and copy corporate records. Corporate records include articles of organization, bylaws, resolutions adopted by the board, minutes of shareholder meetings, records of actions taken by shareholders without meetings, financial statements, corporate communications to shareholders, and names and addresses of directors and officers.

The biggest source of contention is who has the right to do what, and what quorum and how many votes are needed to elect or remove a board member or officer, and to determine a corporate action or transaction. Well drafted articles of organization and bylaws shall address all these issues in accordance with the statutes, thus to minimize the likelihood of future disputes.