Legally a corporation is a “person,” which is liable for contracts signed, money borrowed, and obligations incurred. The laws of the state of incorporation governs the corporation, according to Deborah Bouchox’s book, Fundamentals of Business Organizations for Paralegals, published in 2004. Nearly all states’ statutes are based upon the revised Model Business Corporation Act (MBCA). Additionally, some states have complex bodies of case law interpreting corporate statutes.
Corporate Powers
Most state laws grant powers to corporations based upon MBCA Section 3.02. A corporation has the power to sue and to be sued in the corporation’s name, according to Bouchoux. The corporation may also make and amend bylaws, which regulate the management of the corporation.
The entity may purchase, sell, lease or mortgage real or personal property. The business is responsible for any contracts entered or liabilities incurred. It may borrow money, issue bonds, and lend money. A corporation can also be a member or manager of a partnership or other entity. It can also purchase and hold shares or other interests in other entities. Corporations may also exist perpetually, despite death or withdrawal of members.
Corporate Purposes
The purpose of a corporation is the goals and objectives it intends to achieve. Usually the corporation’s purpose must be stated in its articles of incorporation. State laws usually allow a corporation to be organized for any lawful purpose, according to Bouchoux. The entity will use its corporate powers to achieve its stated purpose.
Types of Corporations
There are several types of corporations, each with its own purposes and structures. A corporation that sells shares to the public at large is known as a publicly held corporation, according to Bouchoux. A “share” is an apportioned ownership interest in the corporation, cited an article on FindLaw, titled "Corporate Structure: Directors to Shareholders." Privately held corporations are formed by a few family members or friends and do not offer shares to the public. A nonprofit corporation is one formed for not making a profit, but for scientific, educational, or religious purposes. Professional corporations are formed for professional practices, such as law or medicine.
A close corporation has shares held by a few people and elects to follow close corporate statutes under state law. This type of corporation may be governed without many of the formalities of other corporations. For example, shareholders are allowed to participate in management, while maintaining limited personal liability. Usually, shareholders in a close corporation agree to offer shares to the corporation or to each other before selling shares to a third party.
Advantages of Corporate Structure
Incorporation may offer various advantages to officers and shareholders. Corporate officers and shareholders are offered limited liability protection, according to Bouchoux. Corporations have a wide range of tax deductions available to them, such as rent, insurance, salaries, legal and accounting services, and costs of benefit and retirement plans. Corporations may also continue to exist perpetually, despite death of a shareholder or withdrawal of a corporate officer. Additionally, a shareholder has the power to transfer or sell interest in a corporation.
Disadvantages of Corporate Structure
Corporate shareholders and officers may experience a variety of disadvantages related to taxation, formation, and management. Corporations are subject to double taxation, which means the corporate entity is taxed for income earned and then the shareholders pay taxes on distributions received, according to Bouchoux. Forming a corporation may be complicated and more expensive than other business structures. Formation may require strict adherence to state laws, incorporation fees, and preparation of legal documents, which may need attorney assistance. Corporations may also be subject to filing and reporting under state and federal requirements.
Those considering a corporate structure for their business may want to consider consulting a legal professional. The forms for incorporation can be complicated and confusing. Also, the advantages and disadvantages may vary slightly depending upon each situation.
Le Bach Pham - After graduating from UCSD with a bachelor of art in English Literature, I am now a web writer for Demand Studios where I write web ...
