People starting small companies often form corporations to operate their businesses and appoint the same individuals as shareholders, officers and board members. While New Mexico law does not prohibit a given individual from wearing all three of these “corporate hats,” it makes sense to consider the purposes of each of these roles and how to benefit from putting some different people in each of these positions:
Board of Directors: This group has ultimate responsibility for the welfare of a corporation although, for larger corporations, these directors often have no involvement in the day-to-day operation of the corporation. Frequently the bylaws of a corporation set forth a mission statement for that corporation. The main obligation of the directors is to ensure that such a mission statement is followed whether that means maximizing profits for shareholders or achieving some other goal unrelated to strictly financial objectives. Among larger corporations, the directors engage in periodic reviews of the broad financial conditions of a corporation and set general policy, including executive compensation levels for the company. The directors may also control the amount of any dividends or distributions extended to shareholders.
Officers: The people holding these positions actually do bear responsibility for the day-to-day operations of their company. They generally possess the most intimate knowledge of how the business works. They must consistently implement all of the mechanisms which enable a business to operate. Officers should therefore have skills, experience or aspirations related to the particular industry or field in which the corporation competes.
Shareholders: These individuals actually own the corporation by holding stock in the company. The goal of shareholders is very simply to maximize the profit they may gain from their investment in the corporation’s stock. Some shareholders may view their investment differently. Some may consider their investment as a long-term goal. Others may want a quicker financial payoff.
Many corporations can and should include individuals who serve in each of these capacities. However, small business owners should try to take advantage of advice or financial investment from those who are not the principals of the business. The placement of some separate members on the board of directors can be quite helpful if those members provide independent guidance regarding important decisions for the business. The fact such directors may be removed from the day-to-day circumstances of a business’s operation may actually give them better perspectives on some issues facing a company. Having additional shareholders beyond the principals may balance the power in the corporation between other shareholders and a plurality shareholder or prevent a single shareholder from being a majority shareholder and therefore, effectively control the corporation to the extent he or she so desires.
These points represent just a thumbnail of the type of factors worthy of consideration when starting a new business. It is vital that those planning to do so consult with experienced attorneys who not only know how to prepare the formal documentation necessary to legally form a corporation but also who can consult about the best practices and procedures which fit the goals and aspirations of the company’s principals. Intensive and candid discussions between the principals and experienced, knowledgeable counsel can enable them to devise a mutually beneficial corporate structure intended to help the corporation succeed over the long-term.
Mr. Giddens and the other attorneys at Giddens & Gatton Law, P.C. have experience advising New Mexico business owners as to which corporate entity will best serve their company’s needs. Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico. Call the office at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com for more information