A corporation is a fictitious person in law. A corporation is like a person without eyes, ears, hands, or intelligence. It also does not have money to start the business. So it needs real people to fund it., to guide it and work for it.
Stockholders or Shareholders
The corporation will need capital (money) to start off. In order to get money for its business, the corporation needs people to give it money in return for a share of its profits. In other words, the more shares you have in a corporation, the greater your share of any profits made by the corporation. These people become stockholders also known as shareholders.
For example: if “A” and “B” decide to form a company they can arrange that the corporation will sell 1,000 shares where each share is valued at $10. If “A” and “B” each contribute $5,000 to the corporation, the corporation will have $10,000 to start its business and “A” and “B” will be 50% shareholders in the corporation with each one of them owning 500 shares.
If the stock in the corporation is sold ten years down the line and the corporation is an extremely successful business then each share will be valued at its worth at that time.
If the corporation fails then each shareholders liability is limited to the amount of money that they paid for their shares, which in this case would be their initial investment of $5,000
This would be the ideal situation for a shareholder. It would provide total protection for all of the shareholder’s other assets, but there is a reality.
The Reality of Limited Liability
Modern commerce often results in a different situation.
Banks will not lend the corporation money, unless it receives guarantees from the shareholders/directors in small corporations.
A landlord will not lease space to a small corporation, unless the rental and other obligations under the lease are guaranteed by the shareholders/directors.
Most suppliers will not sell merchandise to the corporation, unless guarantees are provided by the shareholders/directors.
There is still limited liability for instances where people dealing with the corporation have not requested guarantees and in many cases liability is limited for torts. So if someone gets hurt from a corporate product the directors and shareholders could be protected form personal liability, provided they had no knowledge that the product was dangerous and they directed the corporation to have adequate product insurance liability.
The Rules of the Corporation (By-Laws)
The bylaws can deal with many issues, ranging from the number of directors on the Board of Directors to what procedure must be followed if someone wants to sell their shares.
The Board of Directors will meet as often as the bylaws require e.g. once a month, once every second month, or once a quarter. At the first meeting of directors after the shareholders meeting that elects directors, the officers of the corporation are chosen.
Who are the Directors & Officers of a Corporation?
Who are the Directors?
In small companies the shareholders and directors are often the same people. The difference between a shareholder and a director is that a shareholder owns stock in a company, but cannot tell the company how to run its business.
It is the directors who direct the direction of the corporation. Directors make the policy decisions, which are then carried out by the management of the corporation. A shareholder who has substantial shares in a corporation can vote himself or herself in as a director or nominate someone to be director.
Shareholder meetings are usually held once a year where the directors of the corporation are elected by the shareholders.
Invariably in small corporations with few shareholders, all the shareholders are also directors.
The officers of the corporation are those people who are entrusted with major legal executive positions.
1. The President or Chief Executive Officer
The President steers the corporation in the direction that the Board of Directors have directed. The President ensures that everything is done so that the corporation can achieve the objective set out by the Board of Directors. The President is the supreme general manager. The President is the captain of the ship.
2. The Secretary
The Secretary is involved in maintaining all the corporate records of the corporation. The secretary will ensure that the stock ledger and stocks are correctly recorded and that the minutes of the meetings correctly reflect the decisions of the Board of Directors.
3. The Treasurer
The Treasurer is responsible for the finances of the corporation and to ensure that tax returns and other financial documentation is correctly filed on time and with the proper authorities.
Loans To The Corporation
Since a corporation is an entirely different person in law top its shareholders, it is possible for the shareholders or others to lend it money.
If the structure of your business is a sole proprietorship or a partnership, it is impossible to lend yourself money. If you start doing deals with yourself, like lending yourself money, your are looking to get locked up.
Loans to the corporation may come from two sources:
- Outsiders- These are people who do not have a share in the corporation. For example banks, parents who are assisting children, friends, relatives, and other resources.
- Insiders- If a shareholder lends the corporation money, then when the money is repaid to the shareholder, only the interest is taxed, not the full amount of the loan that is repaid.
Smart shareholders make most of their contribution to the financing of the corporation by way of the loans and as little as possible by purchasing shares. Remember that the price paid by shareholders for shares is not returned to the shareholder, unless the shareholder sells the shares. On the other hand, loans to the corporation can be repaid when the corporation makes profit and the repayment is not a taxable dividend but merely a repayment of the loan.
The Internal Revenue Service allows loans within reason by shareholders. There are not firm regulations regarding the ration between the amount used for purchasing shares and the amount of money that can be loaned to the corporation.
Also, many states require that the corporations must have sufficient share capital for its general needs.
In some jurisdictions in the world, you can pay $1.00 for your share and loan the corporation $99,999.00.
In California, you must capitalize the company with the amount it needs to operate, and then you can loan additional money to the corporation.