Corporation Law: Structure, Powers, and Shareholder Rights

Introduction to the Corporate Form

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

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

Organizing the Corporation

Every state has its own specific requirements relative to the creation of a corporation, but all states require some form of document filing. The required document filings must ordinarily be 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 also be shareholders in another corporation. The Board of Directors oversees the corporation's operations and the performance of its officers. The corporation's officers are responsible for the day-to-day operation of the business.

Liabilities, Powers, and Management

Because corporations are non-human entities, any actions necessary for the formation of the business must be undertaken by a human being. Such an individual is known as a promoter and is responsible for taking the necessary steps to file the required documentation and organize the corporation. This may include purchasing equipment and facilities, hiring personnel necessary for the operation of the corporation before it is formally recognized by the state, and negotiating and signing 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, it can release the promoter and assume the promoter's liability. This process is known as novation.

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, since the drafting of the Model Business Corporation Act most states have altered their statutes to comply with that 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 upon the death of one of the principals.

The management and control of most corporations is determined by a board of directors. The board is generally elected by the shareholders, and the directors are subject to the continued support of those shareholders. The Board of Directors is not involved with the corporation on a daily basis; such responsibility falls upon the corporation's officers. A corporation can have as many officers as its charter allows or operate with as few as one officer. The power and authority of the officers to act on behalf of the corporation are set forth in the documents filed with the state office that recognizes 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 its creditors be provided with a seat on the Board of Directors. This gives the creditor an opportunity to exercise authority in the operation of the corporation in an effort to protect the creditor's financial interest in the business.