After writing about how to file your Statement of Information it occurred to me that how corporations are organized may not be well known. You’ve probably heard terms like Chairman of the Board, CEO, CFO, and CIO, but may not know their meanings or who reports to who. This article will shed some light on the easiest way to structure your small corporation.
The first thing you have to remember is that a corporation is a separate entity from yourself, so even if you own 100% of the shares you still need to follow the rules and that requires an understanding of how corporations work. It can be a little beaurocratic, but here’s a quick summary:
- Shareholders are owners of stock in the company which represents a percentage of the company.
- The Board of Directors are elected by the shareholders to manage the company in a way that is beneficial to the shareholders. The board has a responsibility to ensure the company is financially sound.
- The officers of the company are hired by the board to actually run things. Members of the board can also be officers of the company.
As a small corporation you can keep things simple, but you don’t get a pass on the steps above. If you want to maintain that separation of liability between you and the company you have to structure the company according to the law and treat it like the separate entity it was meant to be.
What does this mean for you as a small corporation? As the sole shareholder you would have to elect yourself to the Board of Directors and then as the leader of the board (typically called the Chairman of the Board) and then hire yourself to whatever officer slots you need to fill. You do have to document this process in a “meeting minutes” document which I’ll show you how to do in my next post and it’s not difficult.
What officer slots do you need to fill? Probably the most well-known officer of the company is the CEO or “Chief Executive Officer”. This is the top dog and all other officers report to this position. Other common officers are CFO, CIO, CTO and COO. See a pattern? I started to type up a simple chart but it looks like Wikipedia beat me to it. Take a look at it here.
Most states have similar requirements for which officers must exist and California is in the majority group requiring three officers in your company: Chief Executive Officer, Chief Financial Officer and Secretary. The Secretary position is not an administrative assistant as the word typically means, but a Corporate Secretary which is the position designated as the company representative on all legal documentation. It’s an important position in charge of ensuring the legal compliance of the company.
The good news is that these corporate officers can all be staffed by the same person – at least in California. For you solopreneurs this means you would hold all three officer positions in addition to the Chairman of the Board. One of my companies I jointly own with my wife and she holds the CFO position.
The law assumes you already understand all this so when you do your corporate minutes documents like your Annual Shareholder Meeting and such you’ll need to structure the language accordingly. Again it’s not hard and I’ll show you how in the next post, but that’s all there really is to it. The shareholders (you) elect the board members (also you) who hires the officers required (again you). Simple.