Your Corporation Needs a Board of Directors... Except When it Doesn’t
In North Carolina a corporation is required to be governed by a Board of Directors, but the corporation is also permitted, in certain circumstances, to use a different form of governance.
The North Carolina Business Corporation Act, G.S. §§ 55-1-01, et eq., sets forth the requirements for forming and operating a corporation. First, it bears mentioning what constitutes a corporation under North Carolina law. The term “corporation” is defined in the Corporations Act at G.S. § 55-1-40, which states as follows:
“Corporation” means a corporation for profit or a corporation having capital stock that is incorporated under or subject to the provisions of this Chapter ....
As opposed to a limited liability company or a partnership, a corporation is a business entity whose ownership is represented stock shares, and whose shares are owned by stockholders.
The highest level of management of a corporation is its Board of Directors. The Board establishes corporate policies and monitors the implementation of those policies by the corporate officers and other agents. The Board does not handle the day-to-day management of the corporation. For that it selects the officers like the president, vice president, secretary, treasurer, and so on. Those officers are then accountable to the board, who can remove them if desired.
Some of the other things a Board of Directors has the power to do under the Corporations Act include the following:
Adopting or amending bylaws;
Make fundamental changes to the corporation; and
Voluntarily dissolve the corporation.
Every corporation is legally required to have a Board of Directors pursuant to G.S. § 55-8-01, which states that “each corporation must have a board of directors.” The section further says that all the corporation’s powers “shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors ....” In short, a Board of Directors is legally required.
But what if you have a corporation and do not want to use a Board of Directors? In a close corporation, you may not need as many layers of management as is required under the Corporations Act. For instance, if three entrepreneurs form a corporation and they intend to run it themselves, do they really need a separate Board of Directors and officers?
The answer, fortunately, is “no.” A corporation may dispense with the Board of Directors and run it by whichever management structure it chooses, so long as those powers are expressly delegated under a written agreement.
The ability to dispense with the Board of Directors is expressly permitted under G.S. § 55-8-01. This section permits the powers of the Board to be exercised by anyone so long as this change to the management of the company is stated in the articles of incorporation. Such a provision should also be included in the corporate bylaws.
Alternatively, rather than removing the board in the articles of incorporation, the shareholders may enter into a separate agreement pursuant to G.S. § 55-7-31. Such an agreement can “eliminate the board of directors or restrict the discretion or powers of the board of directors.” A shareholder agreement eliminating the Board of Directors is a contract separate from the corporate by-laws.
Eliminating the Board of Directors can an ideal way to streamline the management of a close corporation. The objective of managing any corporation, limited liability company, or other business form, should be to make management no more complex than it needs to be. By the same token, the management of a company should be conducted strictly in accordance with whatever form the owners have chosen. Otherwise, the company, management, and shareholders an open themselves up to unintended claims.
Dye Culik PC is a Charlotte, North Carolina business law firm that handles all areas of corporate governance law and litigation. Contact us for assistance with your business law matter.