Question: “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 & illustrate.
A corporation is a legal entity that is created under the laws of a State designed to establish the entity as a separate legal entity having its own privileges and liabilities distinct from those of its members. The word “corporation” is generally synonymous with large publicly owned companies. A corporation may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics.
Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons (“people”). Corporations can exercise human rights against real individuals and the state. They can themselves be responsible for human rights violations. Corporations are conceptually immortal but they can “die” when they are “dissolved” either by statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate ‘death’, when creditors force the liquidation and dissolution of the corporation under court order,but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offences, such as fraud and manslaughter.
The purpose of a corporation is to create trading, manufacturing or other commercial business under a company name (with or without commercial objectives). A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders
FEATURES OF A CORPORATION
Legally, corporations are typically regarded as independent from those who work in them, manage them, invest in them, or receive products or services from them. Although corporate law varies in different jurisdictions, there are some common characteristics of the business corporation.These characteristics are discussed below-
- Legal Entities: Corporations are separate legal entities in their own right.
- Limited Liability: An important (but not universal) contemporary feature of a corporation is limited liability. If a corporation fails, shareholders normally only stand to lose their investment and employees will lose their jobs, but neither will be further liable for debts that remain owing to the corporation’s creditors.
- Perpetual Succession: Corporations are regarded as having perpetual succession, i.e. as an entity they can survive the death of any individual investors, employees, or customers – they simply need to find a new one.
- Owner of all Assets: Corporations itself usually owns all the assets associated with it.
- Artificial Person: Corporations are typically regarded as ‘artificial persons’ in the eyes of the law, i.e. they have certain rights and responsibilities in society, just as an individual citizen might.
- Independent of Shareholders: Corporations are notionally owned by shareholders, but exist independently of them. The corporation holds its own assets and shareholders are not responsible for the debts or damages caused by the corporation.
- Fiduciary Responsibility: Managers and directors have a ‘fiduciary’ responsibility to protect the investment of shareholders, i.e. the senior management is expected to hold shareholders’ investment in trust and to act in their best interests.
- Transferable shares: Shares are transferable.
- Centralized management: Centralized management under a board structure.
- Corporate law: Corporations exist strictly as a product of the corporate law.
OWNERSHIP AND CONTROL
Persons and other legal entities composed of persons (such as trusts and other corporations) can have the right to vote or receive dividends once declared by the board of directors. In the case of for-profit corporations, these voters hold shares of stock and are thus called shareholders or stockholders. When no stockholders exist, a corporation may exist as a non-stock corporation (in the United Kingdom, a “company limited by guarantee”) and instead of having stockholders, the corporation has members who have the right to vote on its operations. Voting members are not the only members of a “Corporation”. The members of a non-stock corporation are identified in the Articles of Incorporation (UK equivalent: Articles of Association) and the titles of the member classes may include “Trustee,” “Active,” “Associate,” and/or “Honorary.
Control of the corporation is determined by a board of directors which is elected by the shareholders. In addition to the limited influence of shareholders, corporations can be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a controlling interest analogous to that of a member, including one or more seats on the board of directors.
FORMATION OF CORPORATION
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. Early corporations were established by charter and many of these chartered companies still exist. Most jurisdictions now allow the creation of a new corporation through registration.
Corporations are usually registered with the state, province, or national government and regulated by the laws enacted by that government. The main prerequisite to the corporation’s assumption of limited liability is registration. The law sometimes requires the corporation to designate its principal address, as well as a registered agent (a person or company designated to receive legal service of process). It may also be required to designate an agent or other legal representative of the corporation.
Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation’s directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.
The law of the jurisdiction in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.
In many jurisdictions, corporations whose shareholders benefit from limited liability are required to publish annual financial statements and other data, so that creditors who do business with the corporation are able to assess the creditworthiness of the corporation and cannot enforce claims against shareholders.Shareholders therefore sacrifice some loss of privacy in return for limited liability. This requirement generally applies in Europe, but not in Anglo-American jurisdictions, except for publicly traded corporations, where financial disclosure is required for investor protection.
NAMING OF CORPORATION
Corporations generally have a distinct name. Historically, some corporations were named after their membership. Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership.
In most countries, corporate names include a term or an abbreviation that denotes the corporate status of the entity (e.g. “Incorporated” or “Inc.” in the United States) or the limited liability of its members (e.g. “Limited” or “Ltd.”). These terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not. Their use puts everybody on constructive notice that they are dealing with an entity whose liability is limited, and does not reach back to the persons who own the entity: one can only collect from whatever assets the entity still controls when one obtains a judgment against it.
TYPES OF CORPORATION
Anyone who operates a business, alone or with others, may incorporate. Given the right circumstances, the owner(s) of a business of any size can benefit from incorporating. Businesses may choose from a variety of corporate entities, based on their needs.
A general corporation, also known as a “C” corporation, is the most common corporate structure. The corporation is a separate legal entity that is owned by stockholders. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder’s personal liability is usually limited to the amount of investment in the corporation and no more.
- Owners’ personal assets are protected from business debt and liability
- Corporations have unlimited life extending beyond the illness or death of the owners
- Tax free benefits such as insurance, travel, and retirement plan deductions
- Transfer of ownership facilitated by sale of stock
- Change of ownership need not affect management
- Easier to raise capital through sale of stocks and bonds
- More expensive to form than proprietorship or partnerships
- More legal formality
- More state and federal rules and regulations
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. , close corporations are limited to 30 to 50 stockholders. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new shareholders. Not all states recognize close corporations. This type of corporation is particularly well suited for a group of individuals who will own the corporation with some members actively involved in the management and other members only involved on a limited or indirect level.
With the Tax Reform Act of 1986, the S Corporation became a highly desirable entity for corporate tax purposes. An S Corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations that have already been formed. Many entrepreneurs and small business owners are partial to the S Corporation because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure.
- S Corporations avoid this “double taxation” (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders.
- like standard corporations (and unlike some partnerships), the S Corporation shareholders are exempt from personal liability for business debt
S Corporation Restrictions
To elect S Corporation status, your corporation must meet specific guidelines.
- All stockholders must be citizens or permanent residents of the United States.
- The maximum number of stockholders for an S Corporation is 75.
- If an S Corporation is held by an “electing small business trust,” then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
- S Corporations may only issue one class of stock.
- No more than 25 percent of the gross corporate income may be derived from passive income.
Not all domestic general business corporations are eligible for S Corporation Status.
- a financial institution that is a bank
- an insurance company taxed under Subchapter L
- a Domestic International Sales Corporation (DISC)
- certain affiliated groups of corporations
Limited Liability Company (LLC)
A Limited Liability Company is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC because they combine the limited liability protection of a corporation with the “pass through”” taxation of a sole proprietorship or partnership. With an LLC, the owners can have the corporate liability protection for their personal assets from business debt as well as the tax advantages of partnerships or S Corporations. It is similar to an S Corporation without the IRS’ restrictions.
- Protection of personal assets from business debt
- Profits/losses pass through to personal income tax returns of the owners
- Great flexibility in management and organization of the business
- LLCs do not have the ownership restrictions of S Corporations making them ideal business structures for foreign investors
- LLCs often have a limited life (not to exceed 30 years in many states)
- Some states require at least 2 members to form an LLC
- LLCs are not corporations and therefore do not have stock
- Do not have the benefits of stock ownership and sales.
In a general sense, a corporation is a business entity that is given many of the same legal rights as an actual person. Corporations may be made up of a single person or a group of people, known as sole corporations or aggregate corporations, respectively. Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade. A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.
1. South African Constitution Art.8, especially Art (4)
2. The Multinational Challenge to Corporation Law, Phillip I. Blumberg
3. The Business Corporations Act (B.C.) [SBC 2002] CHAPTER 57, Part 10
4. Corporate Law (Aspen 1986) 2, RC Clark.
5. The Anatomy of Corporate Law (2004), Hansmann et al, Ch.1, p.2.
6. Corporation, Trust and Company: A Legal History, (1950), C. A. Cooke.
9. Limited Liability Act, 18 & 19 Vict, ch. 133 (1855)(Eng.), cited in Paul G. Mahoney, Contract or Concession? An Essay on the History of Corporate Law, 34 Ga. L. Rev. 873, 892 (2000).
10. Graeme G. Acheson & John D. Turner, The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914, School of Management and Economics, Queen’s University of Belfast, available at .
11. Om Prakash, European Commercial Enterprise in Pre-Colonial India (Cambridge University Press, Cambridge 1998).
12. A Treatise on the Law of Corporations, Stewart Kyd (1793-1794)
13. John Keay, The Honorable Company: A History of the English East India Company (MacMillan, New York 1991
14. Anatomy of Corporate Law: A Comparative and Functional Approach, Kraakman, Reinier H.; et al. (2004), New York: Oxford University Press.
15. Company Law, New York: Oxford University Press, Lowry, John; Dignam, Alan (2006).
16. The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993), Phillip I. Blumberg,
17. The Business Corporations Act (B.C.) [SBC 2002] CHAPTER 57, Part 10
19. The Rise of the Business Corporation in India, 1851–1900, (1970), Radhe Shyam Rungta,
20. The Age of Giant Corporations (1984), R. Sobel.
21. Corporations (1905, repr.1986), J. Davis.
22. The Business Corporation in the Democratic Society (1987), W. Doran.
23. The Corporation: the Pathological Pursuit of Profit and Power (2004), J. Bakan.
 Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993) discusses the controversial nature of additional rights being granted to corporations.
 the Business Corporations Act (B.C.) [SBC 2002] CHAPTER 57, Part 10
 RC Clark, Corporate Law (Aspen 1986) 2; See also, Hansmann et al., The Anatomy of Corporate Law (2004) Ch.1, p.2; C. A. Cooke, Corporation, Trust and Company: A Legal History, (1950).
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