A corporation is a fictitious person in law. A corporation is like a person without eyes, ears, hands, or intelligence. It also does not have money to start the business. So it needs real people to fund it, to guide it and work for it.

STOCKHOLDERS OR SHAREHOLDERS

The corporation will need capital (money) to start off. In order to get money for its business, the corporation needs people to give it money in return for a share of its profits. In other words, the more shares you have in a corporation, the greater your share of any profits made by the corporation. These people become stockholders also known as shareholders.

For example: If “A” and “B” decide to form a company they can arrange that the corporation will sell 1,000 shares where each share is valued at $10. If “A” and “B” each contribute $5,000 to the corporation, the corporation will have $10,000 to start its business and “A” and “B” will be 50% shareholders in the corporation with each one of them owning 500 shares.

If the stock in the corporation is sold ten years down the line and the corporation is an extremely successful business then each share will be valued by its worth at that time.

If the corporation fails then each shareholders liability is limited to the amount of money that they paid for their shares, which in this case would be their initial investment of $5,000.

This would be the ideal situation for a shareholder. It would provide total protection for all of the shareholder’s other assets, but there is a reality.

The Reality

Modern commerce often results in a different situation.

Banks will not lend the corporation money, unless it receives guarantees from the shareholders/directors in small corporations.

A landlord will not lease space to a small corporation, unless the rental and other obligations under the lease are guaranteed by the shareholders/directors.

Most suppliers will not sell merchandise to the corporation, unless guarantees are provided by the shareholders/directors.

There is still limited liability for instances where people dealing with the corporation have not requested guarantees and in many cases liability is limited for torts. So if someone gets hurt from a corporate product the directors and shareholders could be protected from personal liability, provided they had no knowledge that the product was dangerous and they directed the corporation to have adequate product insurance liability.

Who are Directors?

In small companies the shareholders and directors are often the same people. The difference between a shareholder and a director is that a shareholder owns stock in a company, but cannot tell the company how to run its business. It is the directors who direct the direction of the corporation. Directors make the policy decisions, which are then carried out by the management of the corporation. A shareholder who has substantial shares in a corporation can vote himself or herself in as a director or nominate someone to be a director.

Shareholder meetings are usually held once a year where the directors of the corporation are elected by the shareholders.

Invariably in small corporations with a few shareholders, all the shareholders are also directors.

The Rules of the Corporation (Bylaws)

The bylaws can deal with many issues, ranging from the number of directors on the Board of Directors to what procedure must be followed if someone wants to sell their shares.

The Board of Directors will meet as often as the bylaws require e.g. once a month, once every second month, or once a quarter. At the first meeting of directors after the shareholders meeting that elects directors, the officers of the corporation are chosen.

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