Corporation Under the American Legal

¶ … Corporation

Under the American legal system corporations are generally divided into two basic categories: 1) for profit; and, 2) nonprofit. The form that is most popularly used is the profit category and it is the form used to form most businesses in the United States. Corporate organization is governed by state law but under most state laws corporations exhibit five essential elements: 1) represent an artificial legal entity; 2) provide for a centralized management; 3) enjoy a perpetual life; 4) ownership is freely transferable; 5) liability of owners for corporate debts is limited.

Organizing the Corporation

Every state has its own specific requirements relative to the creation of a corporation under its laws but all states require some form of document filing. The required document filings must be ordinarily accompanied by a filing fee and the documents must designate the officers and directors of the corporation. There are no specific requirements relative to the general organization of corporations or as to the number of persons forming the corporation. Ownership of the corporation is vested in the shareholders. These individuals provide the capital for the formation and operation of the corporation. In return for their investment shareholders are entitled to share in the profits of the corporation in accordance with the provisions of the corporate documents. Other corporations may be shareholders in another corporation. The Board of Directors of a corporation over see its operation and the performance of the corporation's officers. The corporation's officers are responsible for the day-to-day operation of the corporation.

III. Liabilities for Transactions before Incorporation

Because corporations are non-human entities any actions necessary for the formation of the business must be undertaken by a human being. Such individual is known as a promoter and is responsible for taking the necessary steps for filing the necessary documentation and organizing the corporation. This may include the purchase of the equipment, facilities, and hiring of personnel necessary for the operation of the corporation before its being formally recognized as such by the state. The responsibilities may include the negotiating and signing of contracts on behalf of the corporation. Traditionally, promoters are personally responsible for all acts taken prior to the official incorporation of the business. Once the corporation is officially recognized the corporation can release the promoter and assume the promoter's liability. This process is known as novation.

IV. Powers of the Corporation

Corporations are recognized, under the law, as a "person" and are therefore liable, like any person, for all contracts signed, money borrowed, or obligations incurred by official representatives of the corporation. Although every state once had differing governing statutes but since the drafting of the Model Business Corporation Act most states have altered their statutes to comply with said Act. Most state statutes allow a corporation to sue and be sued in its own name. It may purchase, sell, lease or mortgage real or personal property and enter into the full range of contractual obligations. Unlike partnerships and sole proprietorships, corporations can exist perpetually and are not required to terminate on the death of one of the principals.

V. Management and Control

The management and control of most corporations is determined by a board of directors. The board is generally elected by the shareholders of the corporation and the directors are subject to the continued support of the shareholders. The Board of Directors is not involved with the corporation on a daily basis. Such responsibility falls upon the shoulders of the corporation's officers. A corporation can have as many officers as its charter allows or operate with as few as a one officer. The power and authority of the officers to act upon behalf of the corporation are set forth in the documents filed with the state office recognizing the formation of the corporation.

An important player in the operation of the corporation is its creditors. Quite often a contingent element of a corporation's capacity to borrow money is the requirement that the corporation's creditors be provided with a seat on the Board of Directors. This provides the creditor an opportunity to exercise its authority in the operation of the corporation in an effort to protect the creditor's financial interest in the business.

VI. Insider Training

Insider trading involves the use of information garnered through a special relationship with a company that allows an individual to use such knowledge to financially gain from dealing in the sale or purchase of a company's securities. Technically, insider trading is illegal but problems arise in regard to the enforcement of such behavior due to the ambiguous wording of how insider training is defined statutorily. An insider, who would be subject to insider regulation, is any person who is connected with a particular company and has a reasonable access to any information that might have an influence on a company's stock price or general business value. Such information would include the company's financial value, dividend declaration, a major expansion, or the acquisition of a new contract. All insider trading is not illegal. It becomes illegal when one uses information that is unpublished and price sensitive.

VII. Rights of Shareholders

The rights of shareholders depend largely on the laws of the state in which it was incorporated and the language of the corporation's filed documents. In general, however, shareholders enjoy 1) the right to vote on issues affecting the corporation; 2) an undivided interest in the assets of the corporation; 3) the right to transfer their stock; 4) the right to receive dividends as declared by the corporation's Board of Directors; 5) the opportunity to inspect the corporate books and records; 6) right to bring suit against the corporation for any wrongful acts; 7) right to share in any residual assets of the corporation upon liquidation. The rights of shareholders may be much broader than those listed herein. Such rights, as already noted, are dependent on the governing jurisdiction.

VIII. Capitalization of the Corporation

Corporations are formed through the issuing of stock which represents the percentage of ownership of each individual shareholder. The number of shares is set forth in the original documents filed to form the corporation. In forming the corporation, the corporation not only determines the number of shares but also the type of shares that will be available. The types of shares include Par and No Par, Common, Preferred, Participating, etc. Each type of share enjoys specific rights with such rights being set forth in the original corporate filings. The corporation also has the right to determine whether the shares shall be sold privately or publicly.

The type of shares determines how dividends will be distributed. Preferred shareholders receive dividend payments first with the Common shareholders receiving remaining dividends in an amount equal to their share of ownership.

The amount of shares in set forth in the original filing. There is no minimum number of shares but a corporation may not sell more than the number originally authorized unless there has been an amendment to the original documents authoring the sale of additional shares. In the sale of any shares there must be some form of consideration.

Some states have statutes requiring that all corporations be formed with at least a minimum amount of capital. This ensures that the corporation has sufficient assets to operate and to satisfy potential creditors. This requirement is extremely rare in today's market but a few states still maintain such standards.

IX. Distribution to Shareholders

Distribution to shareholders may be done at any time and in any amount but before a distribution can be made the corporation must ensure that by making a distribution the business will remain solvent and that doing so does not violate any provision of the corporation's filed documents. Solvency is determined by examining whether after distribution there remain sufficient assets to pay the corporation's debt in the normal course of business and that there remain assets greater than the liabilities including contingent liabilities.

X. Fundamental Changes in Corporate Structure

Any change in corporate structure must consider the rights of the shareholders and a review of such rights as set forth in the corporate documents. For instance, the shareholders may possess the right to an appraisal before any changes can be affected which may cause a long delay in the process.

One form of structural corporation change involves a merger between two different corporations or other business entity. Such merger can be classified as either statutory or de facto depending on the circumstances. The rights of the shareholders differ depending on the type of merger.

A corporation's structure can also be changed through the sale of substantially all of the corporation's assets. Such a sale would ordinarily require the approval of both the Board of Directors and, at least, a majority of the outstanding shareholders. Like in merger situations, most state statutes also grant shareholders appraisal rights under certain circumstances.

Corporate structural changes may also be affected through the amendment of the filing documents or through the process of dissolution. Both processes require the filing of proper documentation in the state of incorporation and compliance with the corporation's original filing documents.

XI. Conflict of Laws Principles

The unique nature of corporations creates interesting problems in regard to determining where a corporation can be sued or where the corporation can decide to file its own cause of action. A corporation can also elect to avail itself to the courts in the state in which it is incorporated and can also be subject to service in such state as well but the issue is not so easily decided in other circumstances. The operation of most corporations involve interactions with different states and a determination of the corporation's minimal contacts with other states has a major bearing on when and where a particular corporation can be made a part of litigation. The law in this area is highly dependent on the case law of the various states and there are no hard and fast rules that determine whether a corporation might be subject to service in a particular jurisdiction. This is an area of law that remains highly changeable.

Corporations have become an important part of the American economy. Under American law, corporations have become recognized as an entity that are organized so as to provide a convenient method for individuals and business entities to not only pool capital but also limit potential liability. Corporations are generally organized with the purpose of realizing profit but they can also be organized in non-profit form in order to provide social agencies and charitable organizations the opportunity to enjoy the benefits of the corporate form.

Corporations enjoy the status of being considered the same as any individual. They can sue and be sued like anyone else. Unlike other business units such as partnerships and sole proprietorships, corporations are not subject to rules that require that they be dissolved in the event of death or incapacity of one of its principal. Theoretically, the life of a corporation can be perpetual and there are a significant number of corporations operating in the United States that have done so for over a hundred years.

Corporations differ from other business forms in other ways as well. In the case of most business forms, the ownership and management of the business are one and the same. The owner of most partnerships and sole proprietors the owner of the business is intricately involved in managing the business but in the corporate form this is not always the case. In smaller corporations the owner and shareholders may be the same but in many other corporations the shareholders, who are the actual owners of the corporation, have no firsthand knowledge of how the business operates and, in fact, have nothing to do with the operation of the business. Instead, corporations are run by a Board of Directors and Officers who may actually have no ownership interest in the corporation. Most state corporate laws have no specific requirements as to the number of required Directors or the number of officers.

The actual process of incorporating a business is an easy procedure but incorporators must be careful in selecting where to actually file their necessary documents. Among the considerations are the specific corporate laws of the state, whether or not the corporation will be eventually conducting business in other states, the number of shareholders and the corporation's projected revenues, and the corporation's exposure to potential legal liability due to the nature of its operation.

The role of the incorporator, other than determining where to file the corporate documents, is usually an insignificant one but, on occasion, the incorporator may occupy an important role. The incorporator, on occasion, may be responsible for procuring equipment, facilities, and sign contracts on behalf of the corporation. In doing so, the incorporator is taking a considerable risk as he would be liable on all such transactions until such time as the corporation assumes responsibility for such transactions.