The Corporation as a Separate Legal Entity
In contrast to the sole proprietorship and general partnership, which are considered extensions of the individual owner or owners, the corporation is considered a “legal entity with an identity or personality separate and distinct from that of its owners or shareholders and must be thought of without reference to the members who compose it.”
In many respects, corporations are treated as artificial persons under law, unless the law provides otherwise. As an artificial person, a corporation is subject to many of the same rights and obligations under law as a natural person. The courts have found on several occasions that while all statutes that speak of persons cannot be construed to include corporations, the term “person” may include a corporation.
It is the intent behind the statute that must be considered. Because the corporation is a separate entity, the corporation itself is liable for any debts and obligations it incurs. The shareholders, directors, and officers of a corporation are generally not personally liable for the corporation’s debts and obligations merely by virtue of their interest in the corporation.
As a separate entity, the corporation must at all times be in compliance with all relevant laws. The sources of most laws to which corporations are subject are state statutes, common law, case law, federal statutes, and local ordinances.
STATE STATUTES Corporations are created by and generally governed by the statutes of the state of domicile (the state in which the corporation is incorporated). A corporation that is qualified to do business in a foreign state, however, subjects itself to the statutes of that state for certain purposes.
The corporate statutes of every state in the country are derived, at least in part, from the Model Business Corporation Act (MBCA), first published in 1950, or the 1984 Revised Model Business Corporation Act. These acts were drafted by the American Bar Association Section of Corporation, Banking and Business Law.
The 1984 Revised Model Business Corporation Act continues to be revised through the date of this publication. As of December 2007, 31 states have business corporation acts that are an adoption of all, or substantially all, of the Model Business Corporation Act (1984), as amended. In this text, all references to the “Model Business Corporation Act” are to the 1984 Revised Model Business Corporation Act, as amended through December 2007. (See Appendix E for several important excerpts from the 1984 Revised Model Business Corporation Act, as amended.)
Unlike the Uniform Partnership and Limited Partnership Acts, the model corporation acts are just model acts, not uniform acts. The model acts serve as an aid to the state legislatures in drafting their own statutes, and corporate laws still vary significantly from state to state. The laws of the state of Delaware, which is often referred to as the “incorporation state,” have also served as a model to the legislatures of other states.
COMMON LAW AND CASE LAW Corporations are created and governed by statute. Therefore, common and case law play a less significant role in governing corporations. However, the number of corporate issues decided in court illustrates that case law is relevant in interpreting the law governing corporations and in ruling on matters not covered by the statutes.
Because Delaware has such a disproportionately high number of domestic corporations, much of today’s corporate law has been derived from the decisions of the courts of Delaware.
FEDERAL STATUTES Federal law also governs corporations. For instance, securities of publicly held corporations are subject to federal statutes and regulations, as well as the statutes of the state of incorporation. The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002, concerning corporate financial and accounting disclosures, are the major federal laws governing corporations that sell shares of stock or other securities publicly. Corporations are also subject to federal legislation in other areas, including bankruptcy, intellectual property, antitrust, interstate commerce, and taxation.
CORPORATE RIGHTS AND POWERS
As a separate entity, the corporation enjoys certain rights and powers separate from those of its shareholders, directors, or officers. Corporations, as artificial persons, are entitled to many of the same rights as natural persons, including many of the same constitutional rights. There are, however, many exceptions to this rule.
For instance, the Fourteenth Amendment to the Constitution, which guarantees liberty, and the Fifth Amendment, which protects persons from self-incrimination, apply to natural persons only. Additionally, corporations are generally not considered to be “citizens” as that word is used in the federal Constitution.
Many powers are granted to corporations by state statute, and may be limited or enhanced by the corporation’s articles of incorporation. The following section from the MBCA enumerates the powers granted to corporations under the MBCA:
General Powers
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power:
1. to sue and be sued, complain and defend in its corporate name;
2 to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it;
3. to make and amend bylaws, not inconsistent with its articles of incorporation or with the laws of this state, for managing the business and regulating the affairs of the corporation;
4. to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located;
5. to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
6. to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity;
7. to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income;
8. to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment;
9. to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust or other entity;
10. to conduct its business, locate offices, and exercise the powers granted by this Act within or without this state;
11. to elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their compensation, and lend them money and credit;
12. to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents;
13. to make donations for the public welfare or for charitable, scientific, or educational purposes;
14. to transact any lawful business that will aid governmental policy;
15. to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation.
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