Corporate & Securities Guide

A corporation is a legal entity (technically, a juristic person) which has a separate legal personality from its members.  The defining legal rights and obligations of the corporation are: (i) the ability to sue and be sued; (ii) the ability to hold assets in its own name; (iii) the ability to hire agents; (iv) the ability to sign contracts; and (v) the ability to make by-laws, which govern its internal affairs.  Other legal rights and obligations may be assigned to the corporation by governments or courts.

Currently, the modern business corporation is the dominant type of corporation. In addition to its legal personality, the modern business corporation has at least three other legal characteristics: (i) transferable shares (shareholders can change without affecting its legal entity existence), (ii) perpetual succession capacity (its possible continued existence despite shareholders' death or withdrawal), and (iii) limited liability (including, but not limited to: the shareholders' limited responsibility for corporate debt, insulation from judgments against the corporation, shareholders' amnesty from criminal actions of the corporation, and, in some jurisdictions, limited liability for corporate officers and directors from criminal acts by the corporation.

Legal Status

The existence of a corporation requires a special legal framework and body of law that specifically grants the corporation legal personality, and typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person). As such, corporate statutes typically give corporations the ability to own property, sign binding contracts, pay taxes in a capacity that is separate from that of its shareholders (who are sometimes referred to as "members".)

The legal personality has two economic implications. First it grants creditors priority over the corporate assets upon liquidation. Second, corporate assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law.

Limited Liability

The regulations most favorable to incorporation is limited liability for the shareholders.  Unlike in a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations. As a result the owneir potential losses cannot exceed the amount which they contributed to the corporation as dues or paid for shares. Limited liability regulations enable corporations to socialize their costs for the primary benefit of shareholders. The economic rationale for this lies in the fact that it allows anonymous trading in the shares of the corporation by virtue of eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would not likely allow any share to be sold to a buyer of at least equivalent creditworthiness as the seller. Limited liability further allows corporations to raise tremendously more funds for enterprises by combining funds from the owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This in turn greatly reduces the risk for potential shareholders and increases both the number of willing shareholders and the amount they are likely to invest. 

Perpetual Existence

Another favorable regulation, the assets and structure of the corporation exist beyond the lifetime of any of its shareholders, bondholders, or employees. This allows for stability and accumulation of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution. This feature also had great importance in the medieval period, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain. It is important to note that the "perpetual lifetime" feature is an indication of the unbounded potential duration of the corporation's existence, and its accumulation of wealth and thus power. (In theory, a corporation can have its charter revoked at any time, putting an end to its existence as a legal entity. However, in practice, dissolution only occurs for corporations that request it or fail to meet annual filing requirements.)

Corporate Law

Corporate law is the field of law concerning the creation and regulation of corporations and other business organizations. A corporation is a juristic person that is legally treated, in certain instances, as a person; the corporation can own property, execute contracts, sue, and be sued.  Corporate law also includes the law governing the relationships among various constituents of a corporation such as shareholders, directors and management. 

In the United States, corporations are generally incorporated, or organized, under the laws of a particular state. The corporate law of a corporation's state of incorporation generally governs that corporation's internal governance (even if the corporation's operations take place outside of that state). The federal laws of the United States and local law may also be applicable sources of corporate law. 

Corporate law also encompasses securities laws, which govern the conditions under which individuals and companies can issue shares or stock and other securities.  A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt and equity securities such as bonds and common stocks respectively. The company or other entity issuing the security is called the issuer. What specifically qualifies as a security is dependent on the regulatory structure in a country.  In the United States securities are regulated by the Securities & Exchange Commission, as well as individual states.  State securities laws are typically known as "blue sky laws." 

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