Articles

Benefits of Forming a Corporation

A corporation is a statutory creation. The ability to do business in the corporate form is derived from state law. Unlike a sole proprietorship or general partnership, which may be formed merely by the owners beginning to do business, a corporation must follow statutory requirements to begin and continue doing business as a corporation.

Every state has a business corporation statute. These statutes govern those corporations formed under that state’s laws. These corporations are known as domestic corporations. State laws prescribe, for example, how to organize, merge, and dissolve a corporation. They govern such matters as corporate finance, the powers and duties of directors, and the rights of shareholders.

State corporation laws also have some provisions dealing with corporations that do business in their states but that were formed under the laws of another state. These corporations are known as foreign corporations.

Each state specifies the requirements that foreign corporations must meet before transacting business within its borders. Foreign corporations that fail to comply with these laws are subject to fines and penalties.

Many state business corporation laws are based on the Model Business Corporation Act (MBCA). This is a model corporation statute drafted by the American Bar Association. While the MBCA provides a comprehensive, permissive and flexible system for governing corporations, no state has adopted it verbatim. Therefore, it is essential to consult each state’s business corporation law to assess its individual requirements. Most publicly-traded corporations are incorporated in Delaware. These corporations are governed by the Delaware General Corporation Law.

Separate Legal Identity

A corporation exists as a business entity separate and apart from its owners. This means, for instance, that a corporation may sue or be sued in its own name, may own its own property, make its own contracts, pay its own taxes, and have its own rights, responsibilities, and liabilities.

This concept of being a separate legal entity creates special advantages and disadvantages for corporations. For example, because a corporation is a separate entity, it is liable for its own obligations. The individual assets of its owners usually may not be used to satisfy those obligations. Therefore, a shareholder’s risk of loss is limited to the amount of capital invested in the business.

However, courts will disregard the corporation’s separate identity where the shareholder completely dominated the corporation, or otherwise did not treat it as a separate entity, and the corporate form was used to a perpetrate wrong or injustice. In such cases the court may “pierce the corporate veil” and hold the shareholder liable for the corporation’s acts.

Perpetual Existence

State law grants corporations the power to exist perpetually. This is one of the most attractive characteristics of the corporate form of business organization. A corporation is not terminated or affected as a continuing concern upon the death of a shareholder, or upon the transfer of his or her ownership interest. In contrast, a sole proprietorship ends when the owner dies. A partnership may also end when a partner dies, withdraws, or is otherwise incapacitated. Although the life of a corporation may continue ad infinitum, voluntary limitations on corporate existence may be made in the articles of incorporation.

Centralized Management

A corporation may have many owners. Therefore, it is impractical to vest control of the corporation in all of them. Instead, corporate management is vested in a centralized group.

The corporation statutes prescribe a basic structure for the internal organization and management of a corporation. The management of a corporation is under the control of a board of directors elected by the shareholders. Shareholder management functions are usually very limited and take the form of voting at shareholders’ meetings to elect directors and voting on certain major transactions such as a merger or dissolution.

Some corporation laws do, however, allow “close” or “closely-held” corporations to dispense with the board of directors and permit the shareholders to manage the corporation. Close corporations are corporations with few shareholders, whose shares are not publicly traded. Others permit all of the shareholders to enter into an agreement whereby they agree to dispense with the board of directors and manage the corporation themselves.

Corporations also have officers who are the agents through which the board of directors acts.

Corporations typically have a president, vice-president, secretary, and treasurer. Officers are generally appointed by and receive their authority from the board of directors.

Corporate Powers

Because a corporation is a statutory creation, it can only do those things that state law authorizes it to do. These are called its corporate powers. 

Generally, state law provides that a corporation has the same powers as an individual to do all things necessary to carry out its business and affairs. Despite this general statement, corporation statutes also list certain specific powers that corporations have. These include the power to:

  • Sue and be sued in its corporate name
  • Have a corporate seal
  • Make and amend bylaws
  • Buy, sell, own, lease, mortgage and use real and personal property
  • Acquire interests in other corporations or entities
  • Make contracts and guarantees, borrow money, and issue notes, bonds, and other obligations
  • Lend money and invest funds
  • Act as a partner, member or associate of another business entity
  • Conduct its business, have offices and exercise its powers inside or outside the state
  • Establish pension, profit sharing, and other benefit plans

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