If you are an entrepreneur who is ready to build a large corporation or a small businessman looking to expand your existing business, you must understand the basics of corporate structure. The corporate structure is important for properly organizing your company. It lays the framework for your company and ensures seamless management. With a strong corporate structure, you can ensure the smooth functioning of your company.
Hence, it is crucial that you have the know-how of shaping your corporation into a structure. In this article, we will discuss what exactly is a corporate structure and its importance.
What is a Corporate Structure?
Also known as corporate governance, the corporate structure is a way of organizing a business so that it can achieve its goal. The corporate structure determines the ownership, control and authority of a company. Depending upon the goals and needs of companies, corporate structures vary. There is no fixed set of rules for setting up a corporate structure for your company. However, there are some basics that most companies incorporate in their structure that ensure the smooth functioning of the company.
Typically, a corporate structure consists of the following three parts:
· Shareholders- they own the business
· Board of directors- they control and direct the business
· Management team/corporate officers- they look after the day-to-day functionality of the business
Read on to understand these three parts in detail.
1. Shareholders
Shareholders are the people who own the company. They get a return for the company in the form of profits as they own common stocks. Individual shareholders hold different shares of the company. The more shares a shareholder owns, the more he or she will be interested in the company.
Shareholders typically do not take part in daily business activities. They also do not take decisions regarding the formulation of new policies or management. They elect a group of people known as directors who do these tasks for them. The shareholders also have the right to choose the members of the board, change bylaws, dissolve or merge the company with another or dispose of the assets of the company.
Basically, shareholders own and have hands-off control over the business.
2. Board of Directors
The board of directors are elected by the shareholders. The function of the board is overseeing the management team, taking major decisions, approving large budgets and writing bylaws. The board of directors are responsible for ensuring that the goals of the companies are achieved and the interest of the shareholders is protected. The board reports directly to the shareholders. The bylaws of a company decide how many members the board requires.
The board of directors are further divided into three parts:
· The Chair/Chairman
· Inside directors
· Outside directors
1. The Chair or Chairman
The chairman is the leader of the board and the head of the company. He or she maintains communication among the board members and the management team. He or she is also responsible for formulating the company’s business strategy and works with top officers. The chairman represents the board and is the public face of the company.
2. Inside Directors
The inside directors consist of either shareholders or top-level officers from within the company. They deal with high-level budgets, approve initiatives and monitor business strategy. They provide internal perspectives for the board. If the inside directors are also a part of the company’s management team they are called executive directors.
3. Outside Directors
Outside directors have the same responsibilities as the inside directors. They too, take strategic decisions and formulate policies. However, they are not a part of the company’s management team. They provide the board with unbiased perspectives.
3. Management Team/Corporate Officers
The management team or the corporate officers are responsible for the daily functionalities of the company. They are also known as corporate officers. The management team consists of the following three major officers.
1. Chief Executive Officer (CEO)
The CEO is the management’s top officer. He or she is responsible for every operation and reports directly to the chairman or board. It is the CEO’s duty to achieve the company’s goals and implement the board’s initiatives. The CEO may also be designated as the company’s president and be a member of the board.
2. Chief Operations Officer (COO)
The COO is responsible for issues related to marketing, sales, production and personnel. The COO is more hands-on than the CEO and takes care of the organization’s day-to-day activities. He or she reports directly to the CEO. The COO may also be designated as the vice-president of a company.
3. Chief Financial Officer (CFO)
The CFO is responsible for the company’s finances. He or she analyzes and reviews financial expenditure, prepares budgets and monitors costs. He or she provides this information to the board, shareholders and regulatory bodies. The CFO also reports to the CEO and may also be designated as the vice-president of the company.
Importance of Corporate Structure
The importance of corporate structure is as follows:
· Corporate structure defines the roles of the important individuals within a company and that an overlap of tasks does not take place.
· It sets clear distinctions among owners and managers.
· Corporate structure provides the top personnel with distinguished and well-defined responsibilities.
· It allows the most talented individuals to take on the most powerful roles.
· A good corporate structure also attracts investors as it clearly describes how the company functions to achieve its goals.
These benefits presented by corporate structure help a small business to transition into a large multinational company.
Conclusion
A corporate structure is important for the growth of a company. As a company grows, it is critical to lay out well-defined roles and responsibilities for its high-level personnel. This ensures smooth functionalities and seamless management. It also aids in the right decision making and guides the company in the right direction.
In this article, we talked about the basic structure of a corporation. A corporation typically consists of shareholders, board members and the management team. As there are no fixed rules for corporate structures, these roles may overlap to some extent. The exact structure of a corporation is decided in accordance with the company’s goals and interests.
FAQs
1. Is the CEO always the President?
Though in most companies it is the CEO who also fills the role of the president, the CEO does not necessarily need to be the president. In the corporate world, the president is often regarded as the head of a particular segment of a company or a subsidiary.
3. Can the CEO also be the chair?
Yes, the CEO can also be the chair of the company. However, experts suggest that these two roles are separated to ensure unbiased decisions.
3. What is the role of shareholders in a company?
The shareholders are the owners of the company. They do not take part in business activities but have a major say in the decision-making process. They also elect the board members.
