Who Are the Principal and Agents of a Corporation?

In general terms, the principals of a corporation are the owners or investors, referred to as shareholders or stockholders. The agents of the corporation are generally considered to be the board of directors, officers or other persons the corporation authorizes to act on its behalf. In some instances, the principals and agents for a corporation are the same persons.

Corporate Formation -- Principal Action

A corporation is formed under state law as a legal entity that exists separate and distinct from its owners. Under general corporate law, shareholders are required to take action once a year, referred to as the annual shareholder meeting. The primary purpose of the meeting is to elect the board of directors. Any matters that legally require the shareholder's consent, such as a fundamental change in how the corporation operates may also be voted on at the meeting. The shareholders may hold special meetings during the year to vote on other important issues, such as a proposal to dissolve the corporation.

Corporation Principal -- Agent Relationship

After election by the shareholders, the directors act as agents of the corporation and are responsible for managing the overall operations of the corporation. In carrying out this responsibility, the directors appoint officers as required by a state’s corporation law, such as a president, treasurer and secretary, to run the business of the corporation on a daily basis. The officers are also agents of the corporation who are delegated with the authority to act on the corporation’s behalf as stated in the corporation’s bylaws or as required by the board of directors. Such authority generally includes representing the corporation in dealings with third parties, including entering into contracts on the corporation’s behalf.

Close Corporations

Under general corporation law, shareholders as principals have the right to vote for directors as agents of the corporation; however, a shareholder does not have the right to be elected as a director or appointed as an officer of the corporation. In some states, an exception is made for corporations with a limited number of shareholders -- usually less than 35 to 50 -- so that shareholders can dispense with the usually corporate formalities of establishing a board of directors or officers and run the corporation themselves. This situation results in corporations where the shareholders are acting as principals and agents of the corporation.

Single Shareholder Corporations

A corporation can be formed with only one shareholder, who can also be the only director and officer of the corporation. For this type of corporation, the principal and agent are the same person; however, the shareholder can appoint additional directors and officers. Some state corporation laws do require a minimum number of directors and officers even for single shareholder corporations, such as in Texas for nonprofit corporations which must have at least three directors, a president and secretary.

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