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 What Is A Corporation?

A corporation is a specific type of business structure which is created and regulated by state law. More specifically, it is defined as a legal entity that is separate from its owners, or its shareholders. What this means is that only the corporation itself can be held liable for corporate obligations, such as maintaining specific business records.

There are many different types of corporations. Generally speaking, a corporation is classified according to specific factors, including:

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

Some of the most common forms of corporations include:

  • C Corporation;
  • S Corporation;
  • Non-Profit Corporation;
  • Business Corporation;
  • Professional Corporation;
  • Foreign Corporation; and
  • Public or Private Corporation.

However, the term corporation generally refers to the two main categories that corporations are divided into according to tax laws: C Corporations, and S Corporations. The defining difference between these two types is that C Corporations are taxed separately from their owners, while S Corporations are not.

A few benefits to forming a corporation are that:

  • They can survive changes in ownership, which means that they can exist forever;
  • They are considered to be “people,” so they are entitled to certain constitutional protections; and
  • Because only the corporation itself can be held responsible for its obligations, they have limited liability.

To reiterate, corporations are generally created by complying with state corporate laws. The majority of states base their laws on a model act called the Revised Model Business Corporation Act (“RMBCA”).

A corporation is formed when the articles of incorporation is filed with the Secretary of State. In order to form the articles of incorporation, the individual owners or shareholders must agree on a number of factors, which include but may not be limited to:

  • The name of the corporation;
  • The number of shares that the organization is authorized to issue;
  • The number of shares of stock that each owner will buy, as well as the amount of money that they will contribute to the purchase;
  • The specific type of corporation; and
  • The people who will form and manage the corporation.

Corporate shareholders generally select a group of people to serve as the corporation’s board of directors. The shareholders who hold the majority of shares will have ultimate control over the corporation; this is because they have the strongest voting powers, which permits them to elect people to the board of directors.

The board of directors make the important corporate decisions, and as such they are required to meet at least once per year. The board then elects the officers of the corporation, who are the ones in charge of making the day-to-day decisions.

What Are Some Examples Of Shareholder Rights?

When you purchase stocks from a corporation, or create a corporation, you will become a shareholder of that corporation. There are various rights that are associated with becoming a shareholder.

Appraisal rights refer to when shareholders object to the corporation’s actions that may diminish the value of their stock holding. They have the appraisal right to obtain the fair value of their stock investment from the corporation. Generally speaking, this right can be asserted when the corporation engages in:

  • A consolidation or merger with another corporation;
  • The sale or transfer of all or substantially all of the corporate assets; and
  • Charter amendments that could adversely affect the value of the corporation.

Shareholders must adhere to the procedures imposed by state laws in order to invoke their appraisal rights. Generally speaking, it is required that the shareholder:

  • Files a written objection;
  • Votes against the proposal; and
  • Makes a written demand for appraisal and buy-out within a specific amount of time.

Another right would be the right to share in dividends. Unless agreed otherwise, shareholders of the same class of stock will each have the same and equal right to share in the corporation’s dividends. However, the decision to declare dividends is a business decision that is made only by the board of directors.

Shareholders also have the right to approve gifts. Generally speaking, corporations cannot make large gifts of their assets without first obtaining approval from the shareholders. Some other examples of what may be subject to shareholders’ approval include:

  • Bonuses;
  • Stock option plans; and
  • Incentive plans that are not authorized under employment contract, and are paid to officers.

Three other shareholder rights include:

  • The Right To Inspection: Nearly all states allow shareholders some rights in terms of inspecting the corporate books and records. However, there are differences amongst the states in terms of how much information that a shareholder may obtain. In general, this depends on the purpose of the request, as well as the number of shares that the shareholder owns;
  • Preemptive Rights To Buy Stocks: Shareholders sometimes have the preemptive rights to buy additional stocks ahead of other investors, in order to maintain their same ownership interest in the corporation. However, this right is usually not granted if it is not specifically provided in the corporation’s charter; and
  • The Right To Derivative Suits: One or more shareholders may bring suits on behalf of the corporation, as well as for its benefits. These suits are called derivative suits, and derivative suits are generally brought against individual officers or directors for waste and conflict of interest. Shareholders must adhere to the specific procedural rules set by both state and federal laws in order to bring these suits to court.

What Else Should I Know About Corporations In General?

To reiterate, a corporation is liable for its obligations. What this means is that creditors may only rely on the corporation and its business assets in order to receive payments.

Individual shareholders are generally shielded from being held personally liable for business losses, as long as the corporation was properly established and is run appropriately. As such, the only risk that the shareholders face would be any investments that they made in the corporation.

There are specific situations in which limited liability will not protect an owner’s personal assets, and for which they can be held personally liable. An example of this would be when an owner:

  • Personally and directly causes injury to another person;
  • Fails to deposit taxes that are withheld from wages of the corporation’s employees;
  • Engages in activity that is intentionally fraudulent or illegal, and that causes harm to the company or someone else;
  • Personally secures or guarantees a bank loan or a business debt on which the corporation defaults; and/or
  • Treats the corporation as an extension of their personal affairs, rather than as a separate legal entity.

There are some other circumstances in which a court may rule that a corporation does not exist; as such, its owners are actually doing business as individuals. In these cases, the individual owners may be held personally liable for any business obligations that arise.

This happens most frequently when there is a failure to follow corporate formalities. An example of this would be not:

  • Adequately investing in (or “capitalizing”) the corporation;
  • Formally issuing stock to the initial shareholders;
  • Regularly holding meetings of directors and shareholders; and
  • Keeping business records and transactions separate from those of the owners.

Do I Need A Lawyer For Help With Shareholder Rights?

If you are a shareholder, you should speak with a corporate attorney in order to learn more about your rights. Additionally, if you believe your rights have been violated, you should contact an attorney in order to recover any losses that you have suffered. An attorney will also be able to represent you in court, as needed.

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