What are the Consequences of Making Someone a Shareholder in My Business?
The compensation they are entitled to as officers will be determined by the bylaws and resolutions of the company. Compensation of corporate officers is typically decided by the Board of Directors in a large company. Often a resolution is passed to approve a hiring and salary for an officer. A close corporation is a corporation whose shares are not freely traded and are held by a limited number of people. In a Close Corporation shareholder's are actively involved in managing and operating the corporate business. Shareholders ordinarily will agree through a written Shareholder's Agreement how management decisions are made and what restrictions may apply to the sale of stock. Many states require a minimum amount of capital to be contributed to a Close Corporation for the issuance of shares at incorporation.
The Internal Revenue Code allows corporations to claim a "reasonable allowance for salaries or other compensation for personal services actually rendered" as a business expense deduction. Internal Revenue Code 162(a)(1). Compensation includes salary, deferred compensation, stock options, equipment provided (e.g., cars, cell phones, and computers), and health and other insurance. Many states follow federal law on this issue. The "reasonableness" of the compensation will depend upon the specific circumstances.
Factors considered in determining whether compensation is reasonable include:
· the size of the business;
· the corporation's earnings history; and
· salary and compensation paid to other individuals in other corporations performing similar jobs.
If it is determined that an officer is receiving compensation that is unreasonable, the IRS may disallow the compensation as a deduction on the corporation's tax return.
The benefits of being a shareholder include receiving dividends for each share as determined by the board of directors, the right to vote (except for certain preferred shares) for members of the board of directors, to bring a derivative action (lawsuit) if the corporation is poorly managed, and to participate in the division of value of assets upon dissolution and winding up of the corporation.
The implications of being shareholders will also depend on the articles of incorporation, the type of stock issued and how much they get. For example, if the stock is voting stock, a certain percentage of stock could give control over corporate decisions. If you are a close corporation, there is typically a limit on how many stockholders there are. For example, in Delaware, all of the corporation's issued stock of all classes, exclusive of treasury shares, must be represented by certificates and must be held of record by not more than a specified number of persons, not exceeding 30.
The certificate of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
(1) No meeting of stockholders need be called to elect directors;
(2) Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for purposes of applying provisions of this chapter; and
(3) The stockholders of the corporation shall be subject to all liabilities of directors.
Such a provision may be inserted in the certificate of incorporation by amendment if all incorporators and subscribers or all holders of record of all of the outstanding stock, whether or not having voting power, authorize such a provision. An amendment to the certificate of incorporation to delete such a provision must be adopted by a vote of the holders of a majority of all outstanding stock of the corporation, whether or not otherwise entitled to vote.