Corporate and LLC Terms
To someone forming a new business entity for the first time, the roles played by the entity’s principals can be a little confusing. This article briefly explains the various roles and their functions in the two main types of business entities: corporations and limited liability companies.
Corporations are owned by one or more shareholders who hold shares of the corporation’s stock.[1] Shareholders may vote on very significant corporate decisions, such as selling all of the corporation’s assets,[2] but the business and affairs of a corporation are generally managed by or under the direction of its board of directors.[3] Directors are elected by the shareholders at their annual meeting.[4] While the directors are generally responsible for managing the corporation, the corporation’s day-to-day operations are handled by its officers, who are selected by the board of directors.[5] Different states have different requirements for corporate officers.
California, for example, provides that a corporation must have at least three officers: (1) a chairperson of the board of directors, or a president, or both; (2) a secretary; and (3) a chief financial officer.[6] However, unless the corporation’s articles of incorporation or bylaws provide otherwise, any number of these offices may be held by the same person.[7] California law also specifies that the president, or the chairperson of the board if there is no president, is the corporation’s “general manager and chief executive officer,” unless otherwise provided in the articles of incorporation or bylaws.[8] Other than that, the officers’ duties are as provided in the corporation’s bylaws or determined by its board of directors, except that the secretary is responsible for keeping the corporation’s required minutes and other books of record.[9]
Delaware, by contrast, takes a more hands-off approach to corporate officers. Delaware corporations are only required to have “such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the board of directors which is not inconsistent with the bylaws.”[10] Delaware does require that one of the officers, usually titled the secretary, “shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose.”[11] As in California, any number of the corporation’s offices may be held by the same person unless the certificate of incorporation or bylaws provide otherwise.[12]
New York law is also open-ended about officers, providing that the board of directors “may elect or appoint a president, one or more vice-presidents, a secretary and a treasurer, and such other officers as it may determine, or as may be provided in the by-laws.”[13] As in California and Delaware, the same person may hold any two or more offices.[14]
Unlike corporations, limited liability companies (LLCs) are owned by one or more members having membership interests, rather than by shareholders holding shares of stock.[15] The business and affairs of a limited liability company may be conducted either by the members, in a member-managed LLC (which we do not recommend),[16] or by one or more managers, in a manager-managed LLC.[17] As the names imply, in a member-managed LLC, “[t]he management and conduct of the limited liability company are vested in the members,”[18] while in a manager-managed LLC, any matter relating to the activities of the limited liability company is generally decided “exclusively by the managers.”[19]
Unlike a corporation, a limited liability company is generally not required to have any officers.[20] But if officers are appointed, they are likely to have the same titles and duties as corporate officers. In California, for example, the written operating agreement governing the affairs of a limited liability company may provide for the appointment of officers including, but not limited to, “a chairperson or a president, or both a chairperson and a president, a secretary, a chief financial officer, and any other officers with the titles, powers, and duties as shall be specified in the articles of organization or operating agreement or as determined by the managers or members.”[21] An officer may, but does not need to, be a member or manager of the limited liability company, and, as with a corporation, any number of offices may be held by the same person.[22]
Although the terms used are a little different, the concepts of both corporations and limited liability companies are essentially the same. Corporations are owned by shareholders, managed by directors, and operated by officers, while LLCs are owned by members and managed by one or more managers (or sometimes just the member(s)).
[1] See Cal. Corp. Code §§ 184 (“shares” are “the units into which the proprietary interests in a corporation are divided”), 185 (a “shareholder” is “one who is a holder of record of shares” of a corporation’s stock), 400 (issuance of shares).
[3] See Cal. Corp. Code § 300(a); Del. Code Ann. tit. 8, § 141(a); N.Y. Bus. Corp. Law § 701.
[4] See Cal. Corp. Code § 301(a); Del. Code Ann. tit. 8, § 211(b); N.Y. Bus. Corp. Law § 703(a).
[5] See Cal. Corp. Code § 312(b); Del. Code Ann. tit. 8, § 142(b); N.Y. Bus. Corp. Law § 715(a).
[6] See Cal. Corp. Code § 312(a). The corporation may also have such other officers with such titles and duties as are stated in the corporation’s bylaws or determined by its board of directors. Id.
[7] Id.
[8] Id.
[10] Del. Code Ann. tit. 8, § 142(a).
[11] Id.
[12] Id.
[13] N.Y. Bus. Corp. Law § 715(a).
[14] Id. § 715(e).
[15] See Cal Corp Code §§ 17701.02(r) (“membership interest” means “a member’s rights in the limited liability company, including the member’s transferable interest, any right to vote or participate in management, and any right to information concerning the business and affairs of the limited liability company”), 17704.01 (becoming a member); Del. Code Ann. tit. 6, § 18-301 (admission of members); N.Y. Ltd. Liab. Co. Law § 102(r) (“membership interest” means “a member’s aggregate rights in a limited liability company, including, without limitation: (i) the member’s right to a share of the profits and losses of the limited liability company; (ii) the member’s right to receive distributions from the limited liability company; and (iii) the member’s right to vote and participate in the management of the limited liability company”).
[16] See eMinutes, “Why We Don’t Recommend Member-Managed LLCs” (Feb. 6, 2022).
[17] See Cal Corp Code § 17703.01; Del. Code Ann. tit. 6, § 18-402. In California, Delaware, and New York, the presumption is that a limited liability company is member-managed unless the articles of organization (California and New York) or limited liability company agreement (Delaware) provide otherwise. See Cal Corp Code § 17704.07(a); Del. Code Ann. tit. 6, § 18-402; N.Y. Ltd. Liab. Co. Law § 401(a).
[18] Cal Corp Code § 17704.07(b)(1).
[19] Id. § 17704.07(c)(1).
[20] See Id. § 17704.07(u) (“A written operating agreement may provide for the appointment of officers[.]” (emphasis added)), (v) (“Officers, if any, shall be appointed in accordance with the written operating agreement or, if no such provision is made in the operating agreement, any officers shall be appointed by the managers and shall serve at the pleasure of the managers, subject to the rights, if any, of an officer under any contract of employment.” (emphasis added)); cf. Del. Code Ann. tit. 6, § 18-407 (manager’s authority to manage and control business and affairs of LLC may be delegated to “agents, officers and employees of a member or manager or the limited liability company”).
[21] Cal. Corp. Code § 17704.07(u).
[22] Id.