The Corporation

The following is an excerpt from the book Smart Business, Stupid Business, written by Diane Kennedy of US TaxAid and Megan Hughes of Smart Business Incorporation.

The C Corporation is the traditional business structure. It has three elements: owners (called shareholders), operators (called officers), and shareholder representatives (called directors). The first two are pretty straightforward. Shareholders own the company, and officers run the company.

Shareholders are passive in a corporations. Unless you are also an officer or director, you can’t participate in the active daily business operations. That limits what you can do. However, it also limits how much you can lose. As a shareholder, you aren’t responsible for what the officers, directors or the company does. If the corporation can’t pay its bills, you aren’t on the hook for its debts. If the corporation engages in criminal activities, you aren’t going to jail. And if the corporation goes under entirely, you can only lose what you invested in the corporation to buy your shares.

Officers are the positions of president, vice-president, chairmen, CEO’s, secretary-treasurers, etc. These are the individuals who carry out the daily functions of the business. These are the people who sign the checks, negotiate and execute contracts, buy and sell equipment on behalf of the corporation, and so on. You don’t need to be a shareholder to be an officer of a corporation.

Directors act as representatives for the shareholders. As a director, you don’t carry out business operations directly but you do oversee business operations and the officers. Again, you don’t have to be a shareholder to be a director.

Directors are elected by the shareholders, each year, at the corporation’s annual meeting. Being a director gives you great power and limited power at the same time. As a director, you’re also the one who appoints the corporation’s officers each year. From that perspective, directors have great power. Yet, if you are only a director, you can’t become involved in the daily operations of a corporation. You can’t sign checks or enter into agreements on behalf of the corporation.

On the other hand, if you are creating a small corporation where you are the shareholder and the officer and the director, it’s a moot point. This distinction really comes into play when the business is much larger and far more people are involved.

The Role of a Resident Agent

Your corporation must also appoint and keep a resident agent is the state where you incorporate and each additional state you register the business into. A registered agent is an individual or a service provider that acts as your corporation’s legal face in that state. Legal documents are served on the resident agent instead of the corporation directly. A corporation cannot act as its own resident agent, but a shareholder, officer, director, or anyone else for that matter, may act in that role.

Can you act as the resident agent for your business? You can, but most businesses use a third party service provider for this service. It’s easier to pay for the service rather than have to put your home address on the record for all to see. IF you prefer to keep a low profile, that is hard to do with your name splashed on the public record.

Service provider rates vary from a few hundred dollars each year to more than $100 per month, so it pays to shop around. Look for an established provider that has been in business for some time. Remember, part of your corporation’s existence is tied to this position. All corporations must have a current resident agent at all times. If your agent resigns, you forget to appoint a new one, or you don’t realize your agent has resigned, your corporation could be dissolved by the state.

If you enjoyed today’s blog, why not pick up your copy of Smart Business, Stupid Business today. Buy through our website, and you’ll also get a free instant audio download of the entire book!