21: Corporation—General Characteristics and Formation
- Page ID
- 11164
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)After reading this chapter, you should understand the following:
- The historical background of the corporation
- How partnerships compare with corporations
- What the corporation is as a legal entity, and how corporate owners can lose limited liability by certain actions
- How corporations are classified
The corporation is the dominant form of the business enterprise in the modern world. As a legal entity, it is bound by much of the law discussed in the preceding chapters. However, as a significant institutional actor in the business world, the corporation has a host of relationships that have called forth a separate body of law.
- 21.1: Historical Background
- This page explains the historical development of corporate formation, stressing its roots in political and religious contexts and the initial constraints imposed by royal authority. It details the rise of joint-stock companies and the impact of England's Bubble Act of 1720, which stunted corporate growth until the 19th century. In contrast, U.S. corporate laws became more liberal, particularly in Delaware, leading to a proliferation of registered corporations.
- 21.2: Partnerships versus Corporations
- This page compares partnerships and corporations, highlighting their differences in formation, ownership, control, transferability, financing, and taxation. Partnerships are easier to form, allow shared ownership and control, and have single taxation. In contrast, corporations have a more complex structure with a separation of management and ownership, facing double taxation on profits. Both structures have unique advantages and disadvantages regarding financing and the transfer of interests.
- 21.3: The Corporate Veil- The Corporation as a Legal Entity
- This page discusses the legal rights of corporations versus natural persons, focusing on the protective corporate veil that shields shareholders from personal liability. It outlines corporations' rights, including First and Fourth Amendment protections, while noting limitations like the absence of self-incrimination rights.
- 21.4: Classifications of Corporations
- This page explains the classifications of corporations, including nonprofit, municipal, professional, and business types. Nonprofit corporations serve various purposes without distributing income to members, while municipal corporations are government entities. Professional corporations cater to specific professions. Business corporations are further divided into publicly held, with widespread stock distribution, and closely held, which make up about 90% of U.S.
- 21.5: Corporate Organization
- This page discusses the corporate charter issuance process, highlighting promoters' roles, their legal responsibilities, and the significance of choosing a favorable state like Delaware for incorporation. It outlines requirements for articles of incorporation, such as the corporation's name and purpose, and stresses the importance of drafting flexibility. The first directors' meeting is crucial for adopting bylaws and conducting business.
- 21.6: Effect of Organization
- This page details the differences between de jure and de facto corporations and introduces the concept of corporation by estoppel. A de jure corporation is legally formed when all incorporation requirements are met, while a de facto corporation may be recognized under specific conditions if not fully compliant. Corporation by estoppel allows businesses to be treated as corporations for fairness, even if some requirements are unmet, to avoid unjust results in contracts.
- 21.7: Cases
- This page covers legal rulings on corporate speech and liability. The Supreme Court ruled in First National Bank of Boston v. Bellotti that limits on corporate contributions to referenda violate First Amendment rights. In United States v. Bestfoods, it clarified conditions under which parent corporations can be held liable for subsidiaries.
- 21.8: Summary and Exercises
- This page explains the nature and establishment of corporations, emphasizing limited liability, ownership-management separation, and perpetual existence. It details the incorporation process, including filing articles and obtaining a charter, and discusses fiduciary duties and corporate veil issues in fraud cases. Various corporation types, such as publicly held and not-for-profit, are identified.