When structuring a nonprofit or for-profit corporation in California, business leaders must clearly define the roles and hierarchy of executive officers. Among the most critical distinctions is that between the President and Chief Executive Officer (CEO). While these roles may be combined in some organizations, others may appoint separate individuals to these positions. It is common-place for small family owned businesses to want to give everyone in the family some kind of title, i.e. naming daughter the CEO and the son President without a clear understanding of the roles. Understanding the legal framework governing these offices helps prevent ambiguity in governance and ensures regulatory compliance.
Thankfully, this ambiguity can easily be avoided. Business owners just need to recognize that the template forms we all build off of have important terms going to internal governance, and that not all template forms are the same. Understanding this at the beginning will help avoid issues down the road when internal disputes among the stakeholders and senior management in a company may arise.
California Corporations Code Requirements for Officers
The California Corporations Code mandates certain officer positions for corporations. Under California Corporations Code § 312(a) for for-profit corporations and § 5213(a) for nonprofit public benefit corporations, a corporation must have:
- A President or a Chair of the Board (or both),
- A Secretary, and
- A Treasurer or Chief Financial Officer (CFO).
Unless the bylaws or articles of incorporation state otherwise, the President typically functions as the general manager and chief executive officer of the corporation. This default rule means that, absent explicit designation of a CEO, the President assumes the highest managerial role.
For unincorporated associations, California Corporations Code § 18025 defines an officer as a person designated under the association’s governing documents, while § 18115 specifies that the President and Secretary hold authority over major transactions, including real estate dealings.
CEO vs. President: Understanding the Hierarchy
Although California law does not explicitly define a hierarchy between a President and a CEO when both roles exist, it is crucial for corporate governance documents to outline the distinction.
In many corporations:
- The CEO is the highest-ranking executive, responsible for overall business strategy and operations.
- The President may report to the CEO and oversee day-to-day management, often handling internal affairs while the CEO focuses on external relationships, investors, and regulatory matters.
However, if a corporation does not clarify these roles in its bylaws, the default assumption under California law is that the President is the CEO unless otherwise stated. This assumption can lead to disputes over authority, particularly in decision-making, contract execution, and board relations.
Regulatory Considerations: Proposition 65 and Employee Count
Another key reason to differentiate between CEO and President roles is compliance with regulatory laws such as California’s Proposition 65 (Safe Drinking Water and Toxic Enforcement Act of 1986). We all see these notices that a product, location or ingredient may contain chemicals known to cause cancer, birth defects or other reproductive harm. Consumers should be informed when they are being exposed to harmful substances. From a business’ standpoint, the cost of compliance can be high.
Under California Code of Regulations, Title 27, § 25102(n), Proposition 65 applies to businesses with 10 or more employees. Regulatory bodies may consider the CEO as an employee for the purpose of meeting this threshold, particularly if they receive compensation and perform active managerial duties.
Failing to properly categorize officers could inadvertently subject a business to Proposition 65 enforcement actions if an entity assumes it is below the regulatory employee count threshold.
In a similar vein, note how the current versions of the Statements of Information forms for California give the option of naming a CEO for a limited liability company. Be aware that having a CEO for an LLC could unintentionally increase the number of persons counted as employees for purposes of Prop 65.
Avoiding Ambiguity: The Importance of Clear Designation
Clearly defining the roles of the CEO and President within corporate documents, including bylaws, employment agreements, and board resolutions, helps:
- Establish Decision-Making Authority: Avoids internal disputes regarding who has the final say on business matters.
- Clarify Legal Representation: Ensures that contracts, regulatory filings, and compliance documents are signed by the appropriate officer.
- Prevent Confusion in Leadership Transitions: Helps boards of directors and shareholders understand leadership succession planning.
- Ensure Regulatory Compliance: Avoids inadvertent classification issues for employment law, tax, and environmental regulations like Proposition 65.
Final Thoughts
While California law provides flexibility in structuring corporate leadership, failing to explicitly define the relationship between a President and a CEO can lead to confusion, disputes, and regulatory challenges. Business leaders should work with legal counsel to draft corporate bylaws and policies that clearly delineate these roles to maintain effective governance and compliance.
For companies navigating these distinctions, it is essential to consider both statutory requirements and practical implications to ensure smooth operations and prevent future legal complications.