In corporate law, there are several different categories of people involved with the

corporation. In small corporations, it is common for the same people to function in

several positions or capacities. They just wear different hats, so to speak. In a one
person corporation, the owner may function in all capacities. The main capacities or
positions include the following:
Incorporator The incorporator is the person or entity that files the initial articles
of incorporation with the state Corporate Filing Office. The incorporator does not
have to be a shareholder, director, or officer of the corporation. Sometimes the
incorporator will be an attorney or other person who is assisting with the
organization of the corporation. Often, the incorporator(s) will be one or more of the
initial organizers of the business. Depending on who the incorporator is, once the
initial paperwork is filed, the incorporator may or may not have any further
involvement with the corporation.
Shareholders Shareholders are the owners of the business. They own a
percentage of the whole business determined by the number of shares of stock they
have been issued compared with the total shares of stock that have been issued.
For example, in a one-person corporation, the sole shareholder owns 100% of the
issued stock. In a three-person corporation, if each shareholder owns equal shares
then they each own 1/3 of the issued shares of the corporation. Each time more
shares are issued, the percentage ownership for each shareholder may change.
Shareholder Rights The rights of shareholders are usually set out in the state
corporation laws and generally include:
(a) the right to vote for directors of the corporation;
(b) the right to participate in dividends, if the payment of dividends is authorized by
the directors and;
(c) the right to inspect the corporations books and records, upon giving reasonable
notice to officers or directors. Shareholders do not own specific corporate property

but rather a percentage of the corporation, which in turn, owns the corporate
property.
Dissenters Rights Some state corporation laws afford rights to minority
shareholders, meaning shareholders who do not own enough shares to control a
vote, who dissent or disagree with majority shareholders on major issues in the
corporation. Usually, these statutes provide a specific procedure for valuing the
minority shares and requiring the majority shareholders to buy out the minority.
Shareholder Duties and Obligations Shareholders are obligated to pay the agreed
upon value or consideration for their shares. Ordinarily, shareholders are not
personally liable for the debts and obligations of the corporation. However, if the
corporation becomes insolvent and cannot pay its bills, and one of the shareholders
has not paid for his/her shares, he/she could be required by a creditor to pay the
agreed upon value for the shares. Beyond payment for the shares, a shareholder
has no obligation unless a court pierced the corporate veil and found them
personally liable for corporate debts.
Majority Shareholders Some state incorporation statutes impose a fairness
standard on majority shareholders, meaning shareholders who own enough shares
to control voting, usually 51%. This means they cannot take undue advantage of
minority shareholders by taking corporate actions that are unreasonable or appear
to serve no legitimate corporate purpose. Examples might be giving larger
dividends to majority shareholders than are given to other shareholders or voting to
have the corporation buy property that belongs to a majority shareholder at an
inflated price.
Directors Individual directors make up the board of directors. The board of
directors as a group has authority to make the management decisions for the
corporation as opposed to the day-to-day operation of the business, which is
normally a function of the officers. A director does not have to be a shareholder or
an officer of the corporation, although in many small corporations, the same
individuals act in all three capacities. The only requirement to be a director in most
states is that a director be 18 or older. Most state corporate laws allow just one

director while some require at least as many directors as there are shareholders.
The typical directors are elected by shareholders, usually at the annual
shareholders meeting but may be appointed by other directors to fill a vacancy in
the board of directors. The corporations bylaws should set forth the election
procedures and qualification requirements for directors.
Directors Meetings Directors as a board or group make management decisions for
the corporation. Corporations are required to have an annual meeting of the board
of directors. Any other meetings are special meetings of the board. Larger
corporations tend to have more meetings while smaller corporations often have
fewer board meetings.
Directors Duties Directors have a fiduciary obligation to the corporation and its
shareholders to act in their best interest in making business decisions. A director
has a duty to exercise due care in making business decisions.
This duty has been defined in various ways such as, the following: A director must
act in good faith, in a manner the director believes to be in the best interest of the
corporation and its shareholders and with such care, including reasonable inquiry,
as an ordinarily prudent person in a like position would use under similar
conditions.
Duty of Care His is a broad standard and most courts interpret it to mean that a
director can make mistakes so long as they had a good reason for making a certain
decision. In other words, lawsuits against directors in small corporations are usually
difficult to prove and therefore not very common.
Example: A director who votes in favor of the corporations purchase of another
business which turns out to be unprofitable, will generally not be liable to
shareholders so long as the director performed reasonable due diligence and relied
upon reports from the corporations professional advisers such as accountants and
attorneys.
Duty of Loyalty This means a director must not take individual advantage of a
corporate opportunity without first making the opportunity available to the

corporation. If the corporation decides not to pursue the opportunity, then the
director can.
Example: A director who, while searching for a parcel of property to build a new
corporate building, finds property well below market value and decides to buy the
parcel for himself with the intent to sell it for a profit. This would be a breach of the
duty of loyalty unless the director first informs the corporation about the property. If
the corporation, through its board of directors, decides not to purchase the
property, then the director would be free to do so.
Conflict of Interest A director should not benefit personally from a transaction or
deal unless there has been full disclosure to and approval of the board of directors.
A director or any other party who stands to benefit personally from a transaction or
deal should not vote on the action.
Example: Suppose a director owns stock in a company that owns a parcel of
property that the corporation would like to lease. The director needs to make certain
that his/her interest in the corporation that owns the property is disclosed to the
other board members and that they approve of the transaction.
Officers Officers are generally appointed by the board of directors and are
responsible for overseeing and managing the day-to-day operations of the
corporation. The basic duties of officers are generally set forth in the bylaws and
may be set out in a separate employment agreement. Specific duties can be
assigned by the board of directors. Officers do not have to be shareholders or
directors but in most small corporations they often serve in all three capacities as
an officer, shareholder, and director.
The most common offices in a small corporation are president, vice president,
secretary and treasurer. However, the board of directors can add to or take from
that list depending on the needs of the corporation (state corporation laws should
be reviewed to see what officers may be required by law). In most states, one
person can hold all of the offices or they can be divided between two or more
people. In a small corporation, the officers may not actually be paid for their service

as an officer of the corporation but rather for their actual services to the corporation
such as a salesman, accountant, or manager.
Special Note: If a corporation has two or more people involved, it is practical to
make certain the president and secretary are different people. This is because
banks and other financial institutions often require the signature or certification of
the corporate secretary to attest that the board of directors has authorized certain
items of business such as a formal banking resolution. If the president and
secretary is the same individual, then some explaining often has to be done. The
secretary does have the important function of keeping the books and records of the
corporation, which are required by corporate statutes.
Caution: Officers, like shareholders, are generally not liable for their acts while
working for the corporation. However, they can be personally liable for harm caused
to another person if the damage was caused by their negligent or intentional act.
Officers have ostensible or apparent authority to bind the corporation to contracts
or agreements unless the party with whom they are dealing is aware they do not
have authority to act on behalf of the corporation. Also, an officer could be held
personally liable on an obligation if it appears the officer has signed an agreement
individually and not in their capacity as an officer of the corporation. Thats why it is
very important that documents are signed in a way that clearly indicates the person
signing is doing so for and on behalf of the corporation.

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