Definition of Corporation Law
While a corporation is a fictional creature, the product of legislation, it is treated for legal purposes much like a person. It can sue and be sued, and it must file income tax returns. Corporate law, or as it's sometimes known, company law, governs the creation, structure and dissolution of corporations.
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Rationale for Corporate Law
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Forming a corporation shields its shareholders from personal liability to the creditors of the corporation. That's meant to encourage people to invest their money in business ventures without having to worry about losing their life savings or personal property. Normally, shareholders risk no more than the value of their shares. In the United States, corporations must register with the state in which they incorporated and file Articles of Incorporation that provide basic details about their operation.
Structure
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The ultimate authority over any corporation belongs to its shareholders. Below that, a board of directors elected by shareholders oversees corporate management and has the authority to hire and fire top executives. Finally, corporate managers like the CEO and CFO run the company's daily affairs and delegate tasks to lower-level employees. The corporate bylaws function as its constitution, with the laws of various states imposing requirements and limitations on their content, such as mandating an annual shareholders meeting.
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Piercing the Corporate Veil
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Since shareholders are not liable for the debts of the corporation beyond their individual investments, they must make sure that the corporation keeps enough assets on hand to meet anticipated debts instead of simply distributing all of its income as salaries and dividends. If no reasonable attempt is made to do this, courts will "pierce the corporate veil," declaring the corporation nothing more than a facade for the individual business activities of its shareholders, and will hold shareholders personally liable for the corporation's debts.
Public Corporations vs. Private Corporations
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A private corporation is generally allowed to sell shares to investors who are considered qualified, that are sophisticated enough, like institutional investors, to know what they are doing. Buyers of these shares are limited in their ability to resell them to third parties. A public corporation sells shares on a public exchange like the New York Stock Exchange. It must make extensive disclosures of the details of its business operations and submit to close scrutiny by the Securities and Exchange Commission.
Corporate Income Tax
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In principle, corporations must pay taxes on their income. Some people complain that this amounts to double taxation: the corporation is taxed on income it receives, and this income is taxed again as individual income tax when it is distributed as dividends and salaries. But the earnings of corporations that qualify under Subchapter S of the Internal Revenue Code will usually be taxed only at the shareholder level, not at the corporation level as well.
Winding Up
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A corporation that wishes to disband must seek permission from the state of its incorporation, which will appoint a receiver to supervise the settlement of its debts to its creditors. This process can be time-consuming.
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