The United States recognizes corporations as distinct legal entities, meaning they are viewed separately from those who own them. One of the primary benefits of this structure is that the owners of the corporation cannot be held personally liable for any of the debts the corporation may have. On the other hand, one of the biggest disadvantages of the corporate form of business ownership is the time and expertise necessary for dealing with the logistics of regulations and tax rules. Fortunately, the structure of a corporation makes it easier to determine who the owner of a corporation is.
Formation of a Corporation
To form a corporation, most states require people to file the articles of incorporation with the respective secretary of state. The portions of shares of stock determine the ownership of a corporation. The total number of shares initially created by a corporation is established while filing the articles of incorporation. The number of shares a company has can change at a later time.
Shareholders of a Corporation
Shareholders are the owners of a corporation and are defined as people who own shares in a corporation. When a company is publicly traded, they offer their shares on a stock exchange for the general public to buy. In that scenario, anyone can become part-owner of a corporation by purchasing their shares.
Private corporations generally have a small number of shareholders, as they do not offer the general public a chance to purchase them. This keeps ownership in the hands of a few.
Shareholders have voting power on certain company-related decisions, and any person or entity that owns 51 percent or more of the shares has a controlling interest.
There are two types of shareholders: common shareholders and preferred shareholders. Although both common and preferred stocks represent ownership in a company, the one critical difference is that preferred shareholders do not have any voting rights when it comes to company matters, such as selecting the board of directors. Preferred shareholders are also guaranteed fixed dividend payments every quarter, unlike common stockholders, for which the dividend amount varies by quarter and is not guaranteed. Companies focused on hypergrowth will likely not pay out dividends to their common stockholders, but their preferred stockholders must be paid regardless.
Board of Directors
Although shareholders technically own a corporation, the board of directors runs it and makes the business decisions. Shareholders elect the board of directors, and although members of the board make business decisions, this does not mean that they are also shareholders. As a result, a board member without ownership interest in a company may be more inclined to be objective with their decisions.
It is not uncommon for a small business to function without a board of directors. This may be because they feel as though they do not need one, or it may simply be because they cannot afford to pay the board members they'd most like to attract.
Ownership Rights of Shareholders
The role of shareholders not only includes the ability to vote in elections for the board of directors, but it also includes the right to vote on specific operational changes; especially when it involves changes in the company's overall direction or fundamental structure.
Shareholders also have the right to vote on matters that affect their stock ownership. This may be in the form of stock splits, mergers or acquisitions. A corporation's executives pay structure may also be voted on by shareholders.