Lesson: Incorporating Your Venture with Augie Rakow

Step #7 Decisions: How decisions get made

The shareholders control the corporation. That's really the default, the bottom, the bedrock principle. The shareholders control the company, and if you own 100% of your company then you really get to call the shots. If you control 51% of the company, then assuming there are no other layers, you get to call all the shots. If two of you together own 51% of the company and there is someone else who owns 49%, the two of you get to really call the shots. So that's the default layer.

Now, there are different kinds of layers that go on top of that.

Stockholders are merely owners. Think of them as a building owner. They don't need to live there. It doesn't mean that they live there. It doesn't mean that they manage the property. It just means that they own it. It just means they own the company. They can also live there, or they can have someone else live there, and they can manage it, but they don't have to. They don't have to live there. They don't have to manage it. They can just own the property.

Stockholders are the same way. Stockholders own the company. It doesn't mean they work there. It doesn't mean they are part of management. They own the company. They delegate fairly high level management to the Board of Directors. Now in a small company, the stockholder usually is the director, but in a large company like McDonald's, there may be people in this room who themselves or their parents own McDonald's shares, it doesn't mean they're in the board room every day. But they do participate in electing the directors.

The directors will typically meet once a month or once every other month. There's not really a pre-set schedule, and they make very broad decisions, and as long as the directors are in place, they as a group call the shots. Now, the default is that the shareholders can change out the directors at any time, but there could be a layer in there that prevents that. There could be a contractual agreement among the stockholders where they've agreed with each other to keep a certain person in place as a director. So it can get kind of complicated. The default is that shareholders elect the directors, and then the directors make decisions like hiring the CEO, hiring the CFO, basic direction of the company, things like that.

So there's stockholders who own, directors who really supervise them. They have fiduciary duties to the stockholders. They're holding the companies kind of in trust for the stockholders, so they make the big decisions and take care of things for the stockholders. Then there is the officers who are the high level employees, the CEO, CFO, Treasurer, Secretary, CTO, various things. So that's sort of how the control works.