A corporation is a legal entity that can own property, enter into contracts, employ people, and otherwise transact business. In Illinois, the rules that govern corporations are found in the Business Corporations Act. The Secretary of State authorizes the corporation to exist by approving the articles of incorporation. A corporation is owned by its shareholders, each of whom own a portion, or “share” of the corporation. The articles of incorporation are usually very generic, listing who the initial shareholders are, and how many shares the company is allowed to sell, and how many are sold to the shareholders at formation. The corporation is operated by various levels of management (directors, officers, and employees), each with their own rights and responsibilities, and the articles of incorporation list who the initial directors and officers are.
At the top of the management food-chain are the shareholders. Shareholders can have voting rights, or may be non-voting shareholders. And depending on the kind of corporation it is, different shareholders may also have different rights regarding how the corporation’s profits are paid out. They meet periodically—usually annually, although it may be more often—to approve the elect a board of directors.
Shareholders also approve a set of bylaws, which is the corporation’s governing document. It sets forth things such as how many directors the corporation will have, the officers that will serve and what their responsibilities will be, how often the shareholders will meet, how often the directors will meet, whether there are certain actions that require a higher percentage vote by the shareholders or directors for approval, etc. The shareholders can amend the bylaws if they choose to. Often times the directors and officers will make revisions, and then present those to the shareholders for approval.
Where the bylaws are silent regarding any given topic, you look to the laws of the state where the corporation was formed to understand how to address any given situation. This is true even if a corporation was formed in one state, but has its principal place of operations in another. For example, corporations used to frequently be incorporated in Delaware because it had a very detailed and well-developed body of corporate law, but would operate all over the country.
Future posts will address some of these terms in more depth, such as the difference between directors, officers, and employees, the difference between C and S corporations, the rights of minority shareholders, and how corporations differ from partnerships, limited liability companies (LLCs). Let us know if there is anything that you would like to knew about corporations, or any other legal topics, and we will do our best to address those issues in future posts.