Understanding the Roles of Officers and Directors in a Corporation

The shareholders of a corporation are the investors who receive ownership in the corporation in return for the money or assets they invest. The shareholders elect a Board of Directors, which has overall responsibility for the business. The Board in turn elects the officers of the corporation to handle the day-to-day affairs of the corporation, along with the employees of the corporation.

Here is an overview of the roles and responsibilities of officers and directors in a corporation.

Board of Directors

The Board of Directors has the overall responsibility for the corporation. The directors must act in accordance with the best interests of the corporation and its shareholders. They have a fiduciary relationship with the corporation, which is founded in trust and confidence. The Board is required to hold annual meetings, but usually meets more often than that.

The Board initially:

Adopts Bylaws
Designates the principal business office
Elects officers
Selects the fiscal year
Designates the corporation’s bank or banks
Issues initial stock to shareholders
Pays organizational expenses
Authorizes initial agreements

On an ongoing basis, the Board will:

Issue securities
Adopt a Stock Option Plan
Amend Articles of Incorporation or bylaws, as necessary
Enter into major contracts, leases, or other obligations
Declare distributions, dividends, or stock splits
Borrow significant sums of money
Enter into employment agreements with key employees
Elect officers of the company
Adopt or amend employee benefit plans
Call shareholders’ meetings
Buy or sell significant assets
Adopt company policies.

Officers' roles

A corporation's officers are responsible for the management and day-to-day operations of the company, and they are appointed by the Board of Directors. Each state's corporation statute will specify the officer positions that must be filled by each corporation. The required officer positions usually include the following:

Chief Executive Officer (CEO) or president

The corporation's CEO or president is responsible for the overall day-to-day activities of the corporation, some of which are often delegated to other officers. The CEO signs major contracts, stock certificates, and other legal documents as required. The CEO acts under the direction of the Board. For substantial actions to be taken, the CEO will act on behalf of the corporation by corporate resolution.

For the record, it's possible for a person to be a voting member of a Board and also serve as the company's CEO. This is quite common with small businesses. Another option is for a company's CEO to have "ex-officio" status on a decision-making board. In other words, the CEO attends and participates in Board meetings but has no voting rights.

Vice president

This officer may or may not be required by your state's corporation statute. When the position does exist, the vice president fills in when the CEO is unavailable or when the board assigns specific duties.

Treasurer or Chief Financial Officer (CFO)

The treasurer is responsibile for the financial matters of the corporation. In a larger corporation, this may consist mainly of oversight; in smaller corporations, this charge will include daily responsibility for financial matters. The treasurer is responsible for maintaining the financial corporate records and for preparing and presenting financial reports to the Board, officers, and shareholders.

Secretary

The secretary is charged with maintaining the corporate records of the corporation and preparing minutes of Board and shareholder meetings. The secretary may also be required to provide certification for banks or other financial institutions, and they may also be required to provide requested copies of corporate documents.

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Actions taken by officers

It's important to remember two significant facts about actions taken by officers:

Executive officers have the authority to legally bind the corporation.
Officers are not personally liable for their acts while acting (lawfully) on behalf of the corporation.

Statutory requirements for officers are generally contained in each state's corporation statute. Check your Secretary of State's website for officer requirements. (See Directory of Secretary of State Offices and Websites for a handy, state-by-state listing of all Secretary of State offices.) The duties and obligations of the officers of your corporation will be contained in your bylaws.

Compensation of officers

The Internal Revenue Code allows corporations to claim a "reasonable allowance for salaries or other compensation for personal services actually rendered" as a business expense deduction (Internal Revenue Code 162(a)(1)). Compensation includes salary, deferred compensation, stock options, equipment provided (e.g., cars, cellphones, computers), and health and other insurance. Many states follow federal law on this issue. The "reasonableness" of the compensation will depend upon the specific circumstances.

Factors considered in determining whether compensation is reasonable include:

The size of the business
The corporation's earnings history
Salary and compensation paid to other individuals in other corporations performing similar jobs

If it's determined that an officer is receiving unreasonable compensation, the IRS may disallow the compensation as a deduction on the corporation's tax return.

Employment agreements

High-level employees, including officers, can be offered employment agreements. Among other things, an employment agreement sets forth the key provisions regarding compensation, duties, and grounds for termination.