What's a Corporation Exactly?

What is a corporation actually? Why do I need all that paperwork when forming a corporation or giving equity?

Corporations are mini-republics, but founded on the principal of one share, one vote. When thinking about structuring your corporation, you should primarily be thinking about 3 kinds of roles:

  • Shareholders

  • Directors

  • Officers

In most start-ups the founder(s) will occupy all three roles. And, even well after a corporation is formed and successful, owners may wish to occupy more than one role.

Shares in a corporation fall into 4 (but really 3) classifications: (i) authorized, (ii), issued, (iii) outstanding, and (iv) treasury. These are the terms to think about to determine who owns what percentage of the corporation and who is or will be diluted.

Further, corporations can put all kinds of restrictions and grant all kinds of rights to its stock. On one hand, a corporation may want to grant stock with many restrictions, such as when incentivizing employees and contractors. On the other hand, investors may (and frequently do) demand certain rights and privileges greater than the founders.

Founders should have at least some familiarity with all these facets of their corporation to plan ahead and be able to assess good deals from bad ones.

Kurt Watkins