“a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. It has neither a mind nor a body of its own.” Explain and illustrate
When a group of businessmen get together and decide to start a business, one decision that they will need to make early on is whether to operate as a corporation or as a partnership. Corporation the form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued. Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships. In this research I am dealing with definition of corporation its characteristics and complete structure of corporation.
A corporation is a separate entity in law and certain advantages flow from this:
- Access to limited liability
- Separation of ownership from control
- Perpetual succession
- Transferability of shares
- Raising finance
A corporation comes into existence by an act of the state. In 1819 the Supreme Court defined a corporation as “an artificial being, invisible, intangible and existing only in the contemplation of law”. Thus a corporation is a legal entity which means that it has a legal existence separate and apart from the existence of its owners.
Once the articles of organization are filled, the corporation exists as a distinct legal person endowed with its own powers. The property owned by the corporation is not the property of shareholders, its managers, or its directors, but is owned by the corporation in the corporate name. This separate and distinct legal entity status provides the stockholders with limited liability. Providing the officers and directors act within the state corporate law, the law of agency, and fundamental stages of behavior, they cannot be held personally liable for business claim.
There are various types of corporations:
- Corporations may be chartered, statutory or registered. The vast majority are registered.
- Corporations may be limited by shares, limited by guarantee or unlimited. A few are limited by guarantee with a share capital. Unlimited corporations do not need to file annual accounts.
- An important distinction is between private company and public corporation. Most companies are private, but only public corporation can offer their shares or debentures to the public. All corporation quoted on the stock exchange are public.
Before the corporation is formed
Promoters are people who bring a corporation into a being. Thus, promotion is a vital activity in a free enterprise system. The promoter is a person who has the idea for a business. He finds people who are willing to finance it to buy shares of stock and or to lend money and credit. Contracts must be made for building or leasing space, buying or renting equipment, hiring employees, buying supplies and advertising, and whatever else is required for the early operation of the business. Most state incorporation statutes permit reserving a name for a proposed corporation. This is also done by the promoter. He must arrange for the filing of the legal papers to incorporate the business and she will usually guide the corporation through the early months or years before the new company is a going concern.
Legal liability of promoters
Liability to the corporation:
The relation of promoters to the corporation, to its shareholders, and to those with whom they contract is unique. Promoters are not agents of the corporation prior to its incorporation because the corporation (the principal) is not yet in existence. Promoters are not agents of the persons who are interested in the venture because the promoters were not appointed by them and are not under their control. Promoters owe a fiduciary duty to the corporation and to the persons interested in it. This includes the duties of full disclosure, good faith, and absolute honesty to the corporation and to the original shareholders. Thus, I would be a breach of duty to use money received on stock subscriptions to pay the expenses of forming the corporation unless this intent were disclosed.
Liability to the third party:
Promoters are generally held liable on contracts they make on behalf of corporations that are not yet formed. If the corporation is never formed, or if it fails to adopt the promoter’s preincorporation agreement, the promoter is liable. This is based on agency law: an agent who makes a contract for a nonexistent principal is personally liable on it. If there is more than one promoter, they are all liable under a joint enterprise theory.
Liability of the corporation
Liability to the promoter:
As a general rule, corporations are not required to compensate promoters for the services they render during the preincorporation period. However, there is nothing illegal or wrong if promoters are paid for their services. Profit to the promoters is illegal only if it is not disclosed. After formation of the corporation, it may agree to pay the p0romoters not only for their exposes but also for their services. Frequently, promoters are issued shares of the stock of the new corporation for their services. In the past, many states had not permitted promotional services to be used as consideration for shares in the new corporation. However, the current trend in law, as evidenced by the revised MBCA, is to permit the corporation to issue shares in return for the promoters’ preincorporation services.
Liability to third parties:
When the corporation comes into existence, it is not automatically liable on the contracts made by the promoter. As indicated above, the corporation cannot be liable as principal since it was not in existence. The same fact prevents the corporation form ratifying the promoter’s contracts ratification requires capacity to contract at the time the contract was made.
Decide where to incorporate:
Two fundamental considerations frequently arise when the promoters are trying to decide where to incorporate. First, the business may be incorporated in a state where the incorporation fees, taxes, annual fees, and other charges tend to be lower. Second, the promoters may decide to incorporate in a state where the corporation statute and judicial decisions grant management considerable freedom from shareholder interference in the operation of corporate affairs.
Steps in incorporation:
The following steps governing the incorporation process are included in the MBCA:
1. Preparation of the articles of incorporation.
2. Signing an authenticating the articles by one or more of the incorporations.
3. Filling the articles with the secretary of state and paying all required fees.
4. Issuance of the certificate of incorporation by the secretary of state.
5. Holding an initial organizational meeting.
Contents of the articles of incorporation:
The articles of incorporation serve the same function as a charter. They are rather like a constitution in that they are the basic document of the corporation and a major source of its powers. The articles will generally be prepared for the corporation by a lawyer because most states have statutes that prescribe the general form of the document; however, these requirements may vary from state to state.
The MBCA lists the following matters that must be included in the articles of incorporation:
1. The name of the corporation, which must not be deceptively similar to that of any other corporation registered earlier. (it must contain the word corporation, incorporated, company, or limited, or an abbreviation)
2. The number of shares of capital stock that the corporation shall have authority to issue.
3. The address of the initial registered office of the corporation and the name of its registered agent.
4. The name and address of each incorporator.
Under the MBCA, the following matter may be included in the articles:
1. The duration of the corporation, which may be, and usually perpetual.
2. The purpose of the corporation. Frequently, this is stated very broadly, such as to engage in any lawful activity.
3. The par value of the shares of the corporation.
4. The number and names of the initial board of directors.
5. Any additional provisions those are not inconsistent with the states corporation law. These may include dividend rights and quorum requirements, as well as procedures for the election and removal of directors.
Issue of shares to the public:
There are different rules applicable to the issue of shares to the public dependent upon whether the issue is to be made via the official list of the stock exchange or on the unlisted securities market or in some other way.
Shares and payment of capital:
A share is the interest of the shareholder in a particular corporation. There are various different types of shares such as ordinary, preference, deferred and management shares. Shares are said to be freely transferable but in the case of private corporations it is often the case that there are various restrictions on transferability. Sometimes the restriction on transferability will give the corporations directors the power to refuse to register a transfer. The power may be a general power of refusal or it may be exercisable on specified grounds. It is a power to refuse so if the directors are evenly split the transfer must go ahead. If the directors have general power to refuse, they cannot be obliged to give reasons for their refusal to agree to the transfer. Sometimes the restriction provides that shares must first be offered for sale to existing members. When shares are issued the directors must take care to ensure that the statutory pre emption provisions are honored. When shares are issued, the directors must also take care to ensure that the corporation receives full payment for the shares. Once, shares have been issued, a return of allotments has to be made to the registrar of corporation setting out the shares that have been issued and the consideration that has been received.
The company is not a natural person. Therefore somebody needs to act on behalf of the company. The division of powers between the shareholders in general meeting and the directors will be considered later. The appointment of directors is a matter which is generally settled by the articles of association. Public company must have at least two directors and private company must have at least one director.
Traditionally directors are said to owe duties to the providers of capital. However, the directors must take account of the interests of employees. Some cases suggest that directors should take account of the interests of creditors. The standard expected of directors in relation to honesty, integrity, and good faith in stark contrast to the standard expected in relation to care and skill. Some of the rules are statutory. Directors are required to disclose to the board any interest they have in a contract to be concluded with their corporation. Certain substantial property transactions involving directors require prior approval.
Death of the corporation
Liquidation or winding up fall into two basic categories: compulsory by court order and voluntary initiated by the members of the corporation. Voluntary liquidations are of two types: members voluntary winding up under the control of the members where the directors have sworn a statutory declaration of solvency, and creditors voluntary winding up. In the latter case, there has been no statutory declaration of solvency and the predominant interest of the creditors is recognized. If the corporation has been trading when it was known that it could not pay its debts, those trading will be civilly and possible criminally liable. Directors and shadow directors may even be civilly liable where they ought to have known that the corporation could not survive.
Through out this research paper shows different parts and whole process of formation of a corporation with its management structure to run a corporation. This is quite certain that a corporation is not a part of its owner; it’s a complete new legal entity like a new person forming in the state. Though it’s an intangible entity so it doesn’t have any mind or body to look after it or take any decision by its own. So its whole management works as its body and mind to control its work. So “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. It has neither a mind nor a body of its own.” Explained.
1. Scaletta, Cameron, (1990). Foundation of business law, 2nd ed. BPI IRWIN.
2. Beatty, Samualson, (1996). Business law for a new century. Little brown and company.\
3. Klaymen, Bagby, Eelis, (1994). Irwin’s business law. IRWINS.
4. Jentz, Miller, Cross, Carkson, (1992). West’s business law, 4th ed. West publishing company.
5. Tucker, E. D. and Henkel, J. W., The Legal and Ethical Environment of Business(1992), Irwin, Boston, USA, p – 354.
6. Bourne, N., Company Law (1994), Cavendish Publishing Lmited, London.
7. Clark, S. L. and Kinder, P.D., Law and Business, 3rd ed. McGraw Hill Inc.
8. Barnes, A. J., Dworkin, T. M. and Richards, E. L., Law for Business(1994), 3rd ed., McGraw Hill Inc.
9. Meiners, R. E., Ringleb, A. H. and Edwards, F. L., The Legal Environmet of Business(1994), 5th ed., West Publishing.
10. Shaw, B. and Wolfe, A., The Structure of the Legal Environment , Law, Ethics and Business(1986), 5th ed., PWS – Kent Publishing Comp.
11. Bohlman, H. M., Dundas, M. J. and Jentz, G. A., The legal Environment of Business(1989), West Publishing.
12. Conless, R. N., Reed, O. L. and Shedd, P.J., The legal Environment of Business(1990), 8th ed. McGraw Hill Inc.
13. Kolasa, B. J., The legal Environment of Business(1990), Addison – Wesley, p 106.
14. Conry, E. J., Ferrera, G. R. and Fox, K. H., The legal Environment of Business(1986), W.M.C. Brown Publishers.
 Company law p 1
 Company law p 7
 The legal environment of business p 106
 Company law p 7
 Business law for a new century p 831
 Irwins business law p 723
 Irwins business law p 724
 Irwins business law p 725
 Irwins business law p 725
 Irwins business law p 726
 Irwins business law p 727
 Irwins business law p 727
 Irwins business law p 727
 Wests business law p 882
 Business law for a new century p 844
 Wests business law p 884
The legal environment of business p 268
 Company law p 87
 Company law p 125
 Company law p 143
 The legal environment of business p 106
 Company law p 269
For: The Lawyers & Jurists
M.L.Hotel Tower Ltd,208,Shahid Syed Nazrul Islam Sarani,
Bijoy Nagar, Dhaka-1000.
Country code+ Ph No.
Direct cell with country code:
Local Code :