Shareholders, Directors and Officers

A major benefit, and the reason most people form a corporation, is to create a corporate shield to protect their personal assets against debts incurred in the course of operating their business. Your ownership interest in the corporation is that of a shareholder.

Those “others” are the officers and directors of the corporation.

If the corporation is maintained as a separate entity, you can be protected from personal liability in most instances by the corporate shield.

There are some drawbacks to forming a corporation. As we have indicated, a corporation is a legal person.

Shareholders

The shareholders, whether one or more, are the owners of the corporation.  Their duties to the corporation are to elect the board of directors, and to share corporate profits in the form of dividends (but only if dividends
are voted by the directors). Frequently the corporation will apply to the IRS to be classified as a “Subchapter S” corporation. That allows corporate profits to be distributed directly to the shareholders as if the corporation was a partnership.

Directors

Directors decide whether dividends, bonuses, or other distribution of corporate funds will be paid.

Officers

The officers are responsible to the directors for the corporation, and ultimately the shareholders. A corporation raises capital by the sale of its shares, so shareholders have an equity ownership in the corporation.  When a sole proprietor forms a corporation to continue their business, they usually sell their business assets to the corporation for shares.  When a sole proprietor forms a corporation, they may wear all three hats; shareholder, director and officer. When a corporation is formed, trade creditors have to be notified about the change in business entity. Bank
accounts need to be changed over to the corporation.

Minutes of Annual Meetings

Texas corporations are required to have an annual meeting of shareholders and annual meeting of directors, and to prepare minutes of those annual meetings.  To learn more, see Prepare Your Minutes Of Annual Meetings.