Corporation - Corporate Law

Corporate Law

Companies law
Company Business
Business entities
Sole proprietorship Partnership Corporation Cooperative
European Union / EEA
EEIG SCE SE SPE
UK / Ireland / Commonwealth
Community interest company Limited company by guarantee by shares Proprietary Public Unlimited company
United States
Benefit corporation C corporation LLC Series LLC LLLP S corporation Delaware corporation Delaware statutory trust Massachusetts business trust Nevada corporation
Additional entities
AB AG ANS A/S AS GmbH K.K. N.V. Oy S.A. more
Doctrines
Business judgment rule Corporate governance De facto corporation and corporation by estoppel Internal affairs doctrine Limited liability Piercing the corporate veil Rochdale Principles Ultra vires
Related areas
Civil procedure Contract

The existence of a corporation requires a special legal framework and body of law that specifically grants the corporation legal personality, and typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person). Corporate statutes typically empower corporations to own property, sign binding contracts, and pay taxes in a capacity separate from that of its shareholders (who are sometimes referred to as "members"). According to Lord Chancellor Haldane,

...a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. —Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd AC 705

The legal personality has two economic implications. First it grants creditors (as opposed to shareholders or employees) priority over the corporate assets upon liquidation. Second, corporate assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law.

The regulations most favorable to incorporation include:

Regulation	Description
Limited liability	Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. This enables corporations to "socialize their costs" for the primary benefit of shareholders; to socialize a cost is to spread it to society in general. The economic rationale for this is that it allows anonymous trading in the shares of the corporation, by eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller. Limited liability further allows corporations to raise large amounts of finance for their enterprises by combining funds from many owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This increases the attraction to potential shareholders, and thus increases both the number of willing shareholders and the amount they are likely to invest. However, some jurisdictions also permit another type of corporation, in which shareholders' liability is unlimited, for example the unlimited liability corporation in two provinces of Canada, and the unlimited company in the United Kingdom.
Perpetual lifetime	Another advantage is that the assets and structure of the corporation may continue beyond the lifetimes of its shareholders and bondholders. This allows stability and the accumulation of capital, which is thus available for investment in larger and longer-lasting projects than if the corporate assets were subject to dissolution and distribution. This was also important in medieval times, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain. (However a corporation can be dissolved by a government authority, putting an end to its existence as a legal entity. But this usually only happens if the company breaks the law, for example, fails to meet annual filing requirements, or in certain circumstances if the company requests dissolution.)

Regulation

Description

Limited liability

Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. This enables corporations to "socialize their costs" for the primary benefit of shareholders; to socialize a cost is to spread it to society in general. The economic rationale for this is that it allows anonymous trading in the shares of the corporation, by eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller. Limited liability further allows corporations to raise large amounts of finance for their enterprises by combining funds from many owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This increases the attraction to potential shareholders, and thus increases both the number of willing shareholders and the amount they are likely to invest. However, some jurisdictions also permit another type of corporation, in which shareholders' liability is unlimited, for example the unlimited liability corporation in two provinces of Canada, and the unlimited company in the United Kingdom.

Perpetual lifetime

Another advantage is that the assets and structure of the corporation may continue beyond the lifetimes of its shareholders and bondholders. This allows stability and the accumulation of capital, which is thus available for investment in larger and longer-lasting projects than if the corporate assets were subject to dissolution and distribution. This was also important in medieval times, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain. (However a corporation can be dissolved by a government authority, putting an end to its existence as a legal entity. But this usually only happens if the company breaks the law, for example, fails to meet annual filing requirements, or in certain circumstances if the company requests dissolution.)

Famous quotes containing the words corporate and/or law:

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