Part of the “Launch It Legally: An Attorney’s Guide to Starting Your Business” series
A previous blog post discussed different types of business entities, such as corporations and limited liability companies (LLCs) and the factors you should consider when determining which type of structure to choose for your business.
This post explains the ownership and management structure of both corporations and LLCs. It will address who these key players are and what responsibilities and obligations they have to each type of company.
Corporations
Shareholders
The shareholders are the owners of the corporation. Shareholders own stock (also called shares) in the company, and the rights and obligations of shareholders are outlined in a Shareholder Agreement. C-Corps can issue different classes of shares, while corporations that are taxed as S-Corps can only have one class of shares.
Shareholders do not manage the business or make day-to-day decisions, unless they are also on the Board of Directors and/or are also officers. Shareholders are generally not liable for debts of the business; however, businesses should always make sure to work with legal counsel to ensure they are running their business correctly in order to avoid shareholder liability.
Shareholders must meet at least once a year to discuss the state of the company and to elect the directors for the upcoming year. Failure to abide by these corporate formalities could lead to shareholder liability.
Board of Directors
The Board of Directors (referred to as the “Board” or “directors”) governs the business and policy of the company, and makes high-level decisions. By statute, corporations are required to have a Board, but the number of directors and the extent of the Board’s power are articulated in the entity’s Bylaws. Certain consequential decisions may require shareholder approval. Directors are appointed by the shareholders on an annual basis.
Officers
Officer positions include the President, Vice President, Secretary, and Treasurer. The Bylaws will specify which officer positions are available at the company and the duties for each position.
Officers differ from the Board of Directors in that officers are responsible for carrying out the decisions made by the Board, and for managing the business day-to-day. The Board appoints officers on an annual basis. In some cases, an officer may also have a seat on the Board.
Limited Liability Companies (LLCs)
Members
Like shareholders of a corporation, the members of an LLC are the owners of the business. However, LLCs do not have shares or stock like corporations do. Rather, members of an LLC own “interest” in the LLC. Sometimes an LLC will issue “units,” which are similar to shares in a corporation. In this case, members of the LLC will own units of the business.
In Illinois, LLCs are automatically “member managed,” meaning, as the name suggests, that members manage the LLC and make decisions for the company. If the members do not want to manage the business and instead want to appoint a separate manager, the company’s Operating Agreement (i.e., the governing document) must state specifically that the company is “manager-managed.”
In manager-managed LLCs, the members can also be the managers, but they do not have to be. They can appoint a non-member manager to run the business. In manager-managed LLCs, a member who is not also a manager owes no duties to the company or the other members solely because they are a member. An Operating Agreement, while not legally required, is highly advised.
The Operating Agreement outlines decisions that members and managers may make for the business. Sometimes large-scale decisions, such as selling the business or adding members, are reserved for the members. Members and managers have great flexibility in contracting their rights and obligations in an Operating Agreement.
Managers
Those responsible for running the LLC and making decisions for the business are the managers. As discussed above, the manager can also be a member. Like members, managers are generally not liable for debts of the business. Managers are not owners of the business, and while oftentimes they are paid a salary for their duties as a manager, they do not share in the profits and losses of the company as members do.
Some LLCs also appoint officers, though this is not very common. In larger companies with many members and managers, the Operating Agreement may vest control of decisions in a “Board of Officers,” similar to corporations. However, this is not necessary and can complicate the structure, especially for smaller businesses.
Seek Informed Counsel
It is always wise to work with business attorneys who understand entity formation and the benefits and drawbacks of each structure. Ideally, your counsel should also be familiar with drafting and negotiating both Shareholder Agreements and Operating Agreements and be able to advise you on the terms that would best protect the various interests at stake.