How do corporations work?

From time to time, I find it’s helpful to remind myself and my clients of the basic parts of a corporation.  Keeping this in mind can clarify disputes and suggest solutions without having to get into complex factual analysis. 

This will be the first is a series of posts from time to time that will try to boil complex legal structures down to basic plain-English elements:

A high-level and possibly helpful summary of the lifecycle of corporations:

-        SHAREHOLDERS create the CORPORATION and fill it with ASSETS.

-        SHAREHOLDERS elect DIRECTORS for the CORPORATION to PLAN how to use the ASSETS.    This might involve giving the CORPORATION some LIABILITIES at the same time, such as debt.

-        The DIRECTORS are obligated by law to try to make a good PLAN.  They are also obligated by law to try to give the SHAREHOLDERS a NET PROFIT.

-        DIRECTORS appoint OFFICERS for the CORPORATION and give them the orders to make the CORPORATION follow the PLAN for the ASSETS.

-        OFFICERS will cause the CORPORATION to hire the EMPLOYEES.  The EMPLOYEES will use the ASSETS to create GROSS PROFIT.  The CORPORATION might obtain more LIABILITIES as it operates, such as tax liability.

-        The OFFICERS (usually) cause the CORPORATION to pay off (some or all) of the LIABILITIES with the GROSS PROFITS.  If the PLAN worked, there will be NET PROFIT.

-        The DIRECTORS will give (some or all) the NET PROFIT to the SHAREHOLDERS.  The rest would be RETAINED PROFITS.  From time to time, they will propose a REVISED PLAN to use the RETAINED PROFITS and the ASSETS and/or give the CORPORATION more LIABILITY. 

-        The SHAREHOLDERS will approve or refuse the NEW PLAN and may fire and re-elect DIRECTORS. 

-        This continues until the CORPORATION is SOLD or GOES BANKRUPT.  This means that the CORPORATION can continue forever, so long as the PLANS are good and there are always enough GROSS PROFITS to handle the LIABILITIES.

Every for-profit organization has at its heart this basic cycle, no matter how small – even when it’s only one person (for example, in a personally-held Medical Professional Corporation, the doctor is the shareholder, the director, the officers (President and Secretary), and the employee)!