Corporate law refers to the body of laws and regulations which govern how corporations are formed, as well as their interactions with other companies, individuals, and the public. These laws address the rights and responsibilities of all people who are involved with the operating, owning, and management of the corporation.
Before continuing to discuss corporate law, it is helpful to first discuss what exactly is a corporation. A corporation is a specific type of business structure that is created and regulated by state law. More specifically, a corporation 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 certain business records.
Generally speaking, a corporation is classified according to specific factors such as:
- Their tax structure;
- The purpose of the corporation; and
- The number of shareholders and amount of stock to be issued.
Some common forms of corporations are:
- 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.
Some other characteristics of corporations include:
- 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 some purposes;
- Different rules regarding stocks and ownership of the company;
- Increased rights and responsibilities of directors and other leaders; and/or
- Preferential tax treatment, in some states.
As such, corporation law clarifies how a company can become a corporation, and how corporations are allowed to participate in the economic marketplace. Corporation law may also be referred to as “company law” or “corporations law.”
How Are Corporations Formed?
Corporations are generally created by complying with state corporate laws. Most states base their laws on a model act, the Revised Model Business Corporation Act (“RMBCA”).
A corporation is formed when articles of incorporation are 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;
- The amount of money each owner will contribute to the purchase;
- The specific type of corporation; and
- The people who will form and manage the corporation.
As each state has its own corporate law requirements, there may be additional factors to include when forming a corporation.
What Are Some Of The Most Common Legal Issues Addressed By Corporate Law?
Corporate laws involve a wide variety of legal issues associated with the creation and operation of corporations. These can include:
- Incorporation and filing processes, such as creating bylaws and other corporate formalities;
- Securities issues, such as those involving stocks, shareholders agreements, and other investments in the company;
- Member liability;
- Rights of the board of directors, as well as other key figures;
- Disputes between corporations and other businesses;
- Business mergers and takeovers; and
- Dissolution or termination of a corporation.
Legal issues associated with corporate law can affect many different parties. Although corporations are considered to be individuals for legal purposes, legal issues associated with a corporation can affect the board of directors and company workers, as well as consumers and many other people.
To simplify, there are five principles commonly associated with corporate law:
- 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(s). This limited liability is what allows corporation owners to take risks in order to diversify their investments;
- Transferable Shares: If a corporation’s owner no longer wants their share in the corporation, that owner can transfer their shares instead of shutting down the corporation entirely. This transfer is easier in comparison to a transfer of ownership in a partnership. However, it is important to note that there are limits associated with how corporate shareholders can transfer ownership;
- Delegated Management: The authority to make decisions regarding the corporation is shared between the board of directors, as well as its officers. Board members are responsible for hiring and monitoring officers, while shareholders elect the board members. The intention here is that no one person has too much power over the corporation, thereby eliminating 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. Rather, owners generally make decisions and share profits proportional to their ownership interest.
Corporate laws exist to keep all corporations operating fairly. Essentially, these laws and regulations exist to ensure that corporations behave in generally predictable ways that others can rely on.
How Are Corporate Law Disputes Resolved?
Disputes may arise when shareholders disagree with each other, or when corporate law is violated in some way. Corporate law disputes frequently involve a considerable amount of assets and resources. These legal disputes are generally resolved through:
- A damages awards to pay for economic losses, loss of business reputation, and other similar costs;
- Remedies related to a breach of contract claim;
- Court orders to alter corporate practices and policies; and
- Changes in the company’s leadership or management structure.
Generally speaking, corporate law is civil law. What this means is that when disputes arise, the corporation’s officials should be able to go to the appropriate civil court in order to resolve its issues. However, it is not uncommon for those involved in a civil law matter to resolve the issue on their own. They may agree to settle and come to a compromise in order to avoid going to trial, and potentially losing the case. Civil settlements generally involve the defendant paying money to the plaintiff, and may result in an enforceable judgment.
In some cases, corporate law disputes may result in criminal consequences, especially for issues such as insider trading or other securities violations. Securities are financial instruments representing some amount of financial value. They generally take the form of a certificate that grants the holder rights associated with the profit distributions of a business. A few common examples of securities include stocks, bonds, and notes.
The legal penalties for securities violations can be considerably severe, as even minor violations can lead to criminal misdemeanor charges. Criminal misdemeanor charges are punishable by a fine, and/or jail time. More serious violations can lead to felony charges. An example of this would be if the violation involved falsifying tax information.
Many types of securities violations can also result in a civil litigation claim. It is not uncommon for the holder of securities to file a lawsuit against a trustee who has failed to manage security assets according to their duty of care. The trustee may then be required to pay damages in order to compensate the plaintiff for their economic losses.
Should I Hire An Attorney For Assistance With Corporate Law Issues?
If you are involved in any sort of corporate law dispute or issue, you should hire an experienced and local corporate lawyer. An attorney can help you resolve your issue while adhering with the corporate laws of your state. Finally, an experienced attorney will also be able to represent you in court, as needed.