Controlled Corporation Laws

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 What is Corporate Law?

Corporate law is a body of laws and regulations that govern the formation of corporations as well as their interactions with:

  • Other companies;
  • Individuals; and
  • The public.

Corporate laws address the rights and responsibilities of all individuals who are involved with the operation, ownership, and management of the corporation. Corporations are specific types of business structures which are created and are regulated by state laws.

A corporation is specifically defined as a legal entity which is separate from its shareholders, or owners. This means that only the corporation itself may be held liable for the obligations of the corporation as well as maintaining certain business records.

Generally, a corporation is classified according to specific factors, which include:

  • Their tax structure;
  • The purpose of the corporation; and
  • The number of shareholders and amount of stock to be issued.

Common forms of corporations include:

  • C corporations;
  • S corporations;
  • Non-profit corporation;
  • Business corporation;
  • Professional corporation;
  • Foreign corporation; and
  • Public or private corporation.

The term corporation, however, generally refers to the two main categories which corporations are divided into pursuant to tax laws, C corporations and S corporations. The distinction between these two types of corporations is that a C corporation is taxed separately from its owner while an S corporation is not.

Other characteristics of corporations may include, but are not limited to:

  • Decreased or limited liability of members of the company, as previously mentioned;
  • Separate legal personality of the company, which means that a corporation may be treated as an individual for certain purposes;
  • Different rules governing ownership of the company and stocks;
  • Increased rights and responsibilities of directors and other leaders; and
  • Preferential tax treatment, in some states.

Corporate laws clarify how companies can become corporations as well as how corporations are permitted to participate in the economic marketplace. Corporate law may also be referred to as company law or corporations law.

What Are Some of the Most Common Legal Issues Addressed by Corporate Law?

Corporate laws govern a wide variety of legal issues which are associated with the creation and operation of a corporation, including:

  • The processes for incorporation and filing, including creating bylaws and other corporate formalities;
  • Securities issues, such as those involving:
  • Member liability;
  • The rights of the board of directors and other key figures;
  • Disputes between corporations and other businesses;
  • Business mergers and takeovers; and
  • Dissolution or termination of a corporation.

The legal issues which are associated with corporate laws may affect many different parties. Although a corporation is considered to be an individual for legal purposes, the legal issues associated with the corporation may affect:

  • The board of directors;
  • Workers at the company;
  • Consumers; and
  • Other individuals.

There are five main principles that are commonly associated with corporate law, including:

  • Legal personality: Corporation owners may combine their assets into a separate entity, which can use and sell those assets;
  • Limited liability: This theory applies to when the corporation is sued; only the corporation’s assets are available for the plaintiff, and not the personal assets of the corporation’s owner or owners. This type of limited liability allows corporation owners to take risks so they can diversify their investments;
  • Transferable shares: If the owner of a corporation no longer wants to keep their share in the corporation, that owner is able to transfer their shares instead of shutting down the corporation entirely. This transfer is easier in comparison to a transfer of ownership in a partnership. It is important to note that there are limits on how corporate shareholders are able to transfer ownership;
  • Delegated management: The authority to make decisions related to the corporation is shared between the board of directors and its officers. Board members are responsible for hiring and monitoring officers, while shareholders elect the board members. This prevents one individual or party from having too much power over the corporation and eliminates potential legal issues associated with abuse of power; and
  • Investor ownership: While corporation owners have the authority to make decisions, they do not actually run the company. Instead, an owner generally makes decisions and shares profits proportional to their ownership interest.

Corporate laws are in place to keep corporations operating fairly. These laws and regulations are in place to ensure that corporations behave in ways that are generally predictable which others can rely on.

What is a Controlled Corporation?

A controlled corporation is any corporation which is effectively owned and controlled by a different corporation. The ownership and control is typically due to another firm owning a certain percentage of the controlled corporation’s voting shares or stock.

The controlled corporation still operates its own business functions, although it may not always have its own full management direction. For example, Ford Motor Credit Company is considered to be a controlled company of Ford Motor Company.

In other words, the Ford Motor Company owns enough of a percentage of the Ford Motor Credit Company to assume control of its policies.

What are the Types of Controlled Corporations?

There are two main categories of controlled corporations, including the parent-subsidiary and the brother-sister.

With the parent-subsidiary category, the company that is in control is the parent company. The controlled company is the subsidiary company. The parent company must own at least 80% of the total voting shares or at least 80% of the total value of all of the classes of the shares of stock of the subsidiary company.

The brother-sister type of controlled group consists of two or more corporations where there are 5 or less individuals who own more than 50% of the total voting shares, or more than 50% of the total value of the stock for each corporation. Additionally, there are also combined groups which are comprised of a combination of the two types of corporations discussed above.

The state laws will vary regarding the regulation of controlled groups so it is important for an individual to check their local laws for specific details.

Which Company can be Held Liable in a Controlled Corporation Structure?

The control aspect of the controlled corporation typically refers to financial matters, including the issuance and ownership of company stocks. The parent company typically has discretion to decide these types of issues, including how stocks are to be distributed as well as who they may be offered to.

The subsidiary group, therefore, may still be held liable for any debts or unlawful activities which can be attributed to the group. In some cases, the parent company may also be held liable.

This applies in cases where a controlled company was specifically authorized or directed by the parent company to perform some action. Typically, these companies will have a contract that describes the nature of their relationship.

The contract will likely contain a clause that expresses whether the companies will be held liable to one another and what should occur in the event of a lawsuit or debt collection. If an individual has a dispute that involves a controlled group, they should request to review the agreements.

Do I Need a Lawyer for Controlled Corporation Issues?

A dispute with a controlled corporation may be a very complex matter. A controlled group may involve numerous different corporations.

In addition, the organizational structure may contain numerous different levels of liability. It may be helpful to consult with a corporate lawyer to determine which parties may be involved in your claim.

Also, if you are thinking about creating a controlled corporation, your attorney can offer advice, advise you of the applicable laws in your state, and assist you in drafting the necessary documents.

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