Blog Ipsa Loquitur

Like Socrates, I know that I know nothing. (Unlike Socrates, if someone hands me a Hemlock smoothie, I’ll probably pass.) But I do know how to create a corporation.

It’s actually a remarkably simple process: you get a person called an “incorporator” to sign a legal document called the Certificate of Incorporation which has some Magic Language (dictated by statute). You send the document off to the Secretary of State (of your state, not Ms. Clinton), and some clerk stamps the document, files it, and proceeds to do the same for the next ten thousand documents in the inbox.

he corporation now exists: there are three categories of people that are more or less unique to the corporate anatomy. We’ve all heard about these people, but I for one was almost completely ignorant of their actual relationship to one another and the corporation before law school.

The first group of people by necessity is the Board of Directors. These people individually have little to no power to run the corporation. Any single Director is virtually powerless, but like the Justice League, when they assemble, they wield formidable powers. By majority vote, they make the big decisions for the corporation like entering into contracts and hiring the second group of people.

The second group of people is the Officers. They have familiar titles like President and Vice President and Treasurer and so on. The officers are elected by the Board of Directors, and hired for lots and lots of money because they’re in charge of running the day to day operations of the corporation. They hire employees like management (who hires other employees like middle managers and janitors) and have meetings and look at charts and pick which widgets they want the company to sell.

The third group of people are the Shareholders. These are people who’ve invested money into the corporation, and in exchange, have the right to get some money back (in the form of dividends) when the company is doing well enough to hand it out.

The Shareholders are the only group that doesn’t owe a very strict duty to act in the best interests of the corporation: the Directors and the Officers can be sued for all kinds of money if they use their powers to do anything to enrich themselves personally: they’re there to serve the corporation and the corporation only. Shareholders can even take their dividends and use it to start a company that directly competes against the corporation. A director would be in big trouble if he tried that.

However, in return, the Shareholders have even less power than the Directors. The Shareholders all get together and elect the Board of Directors: generally speaking, (there are always exceptions in the the law, it seems.) you get one vote for one share. This makes sense: the more money you invest in the corporation, the more of a say you get in the election of the people who have all the say in hiring the people who run the company.

Of course, then, if one person owns a majority of the shares, he can elect whomever he likes to the Board of Directors. It follows that this majority Shareholder, controlling the Board of Directors, can then control who is appointed as an Officer. He can have himself appointed as the President, CEO, or whatever he likes.

Of course, as a practical matter, he’s got the biggest stake in whatever mess he makes, so if he insists on appointing himself President and promptly runs the company into the ground, no shareholder has lost more of their investment than he. The employees are a different story, however. They had better hope that if there’s an egomaniacal shareholder trying to get 51% of the shares, he’s got some solid business acumen.