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In many situations, a general corporation, often referred to as a stock corporation, open corporation or C corporation, is recommended, especially when a company goes public or plans a private offering of stock.
General corporations are also typically used when a company wants to attract venture capital funding.
So what is a general corporation? A general corporation has three tiers of power: shareholders, Directors and officers. Each of these groups has different rights and responsibilities within the corporation.
The shareholders are the owners of the company, but they do not manage the company. Typically, holders of common stock receive one vote for each share they own, and they have the right to help elect the members of the Board of Directors. They can also vote on certain other matters of major significance to the company.
Any stockholder who holds a majority of the shares of issued stock can control the company. This is sometimes referred to as a "majority shareholder." Majority shareholders possess a larger amount of responsibility than minority shareholders.
Any stockholder without a controlling role in the company is referred to as a "minority shareholder." Generally, minority shareholders bear no responsibility to the company, and they are able to assign, or give, their votes to anyone they choose. They can also sell their stock whenever they want.
Shareholders are rewarded in two ways: first, by the dividends paid on their stock when and if the Board of Directors declares a dividend; and second, by the increased value of their stock as the company grows.
The Directors run the company and are responsible for the company's overall management. They take responsibility for all major business actions, such as the issuance of stock, the election of officers, the hiring of key management, the establishment of corporate policies'and the setting of their own and key officers' salaries and compensation packages.
The Board of Directors decides if a dividend will be given to the shareholders and, if so, how much. Individual directors may own stock in the company.
Directors have certain fiduciary responsibilities to the company. They must be loyal to the company; they must make informed, independent decisions as Board members; they must not act in bad faith, such as self-dealing or fraudulent dealings; and they must act in the best interests of the company and its shareholders.
Directors may make decisions and take action in pre-announced meetings with a quorum present, or without a meeting by unanimous written consent of all Directors. Directors cannot give or sell their votes to other directors, nor can they vote by proxy.
Ordinarily, Directors may be removed and replaced—with or without cause— by the majority vote of the shareholders. This is why a majority stockholder can control the company.
The officers of the company work for the Board of Directors and handle the day-to-day business of the company. Officers carry out the Board's decisions and implement the Board's policy. Officers are usually the President, Vice President, Secretary and Treasurer. However, as it sees fit, the Board may appoint other officers, such as a C.E.O., C.F.O., Sales Manager, Operations Manager or any other title it wishes to create.
Officers may be compensated with stock, or they may purchase stock in the company at the discretion of the Board of Directors.Form a General Corporation Now
The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.
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