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Legal Characteristics of the Corporate Form

Corporations and other corporate forms are common in our economic landscape. Average people deal with corporations in every aspect of their lives, from the grocery store to cell phone service providers. Many people probably know that corporations are formed by filling out and filing forms with the California Secretary of State’s office (and paying a fee). Many know that corporations are legal entities that have legal existence separate and apart from the natural persons that formed/created them. This article discusses some of the more important legal characteristics of the corporate form that are less well-known.

Permanence of Legal Entity

The corporate form dates back to the 1600-1700s with companies being chartered — organized — by various governments. The East India Company is a good example from British history. Beyond those chartered companies, however, businesses had to be organized as sole proprietorships or partnerships. Those business forms were not ideal for investments since, if the sole proprietor died, then, likely, the business died. Similarly, if a partner left the firm, the partnership was deemed under the law to be “ended” and a new partnership had to be formed. This is true today of sole proprietorships and general partnerships.

By contrast, the corporate form is stable. It does not end or “fall apart” if a key employee leaves or dies. This continuity of existence makes a passive investment — an investment that does not seek management or control of the business — more attractive.

Corporation Separate Legal Entity From Owners

Another advantage to allowing the modern corporation to have a separate legal existence was the streamlining of the administration of justice and the judicial process. Under pre-modern rules, to sue a business for debt or fraud or some other cause of action, a plaintiff was required to sue each and every partner or owner. If the business had 100 partners, that required service of court papers on 100 defendants. By allowing the corporate form to have a separate legal existence, the management of debts and lawsuits was greatly streamlined. This, too, made passive investment more attractive.

Limited Liability for Investors

As many people know, the modern corporation provides a shield for personal assets. In general, for business-related debts and obligations, creditors can only attach and seize business assets and property. This particular development — limitation on shareholder liability — was introduced into corporation law in the mid-1800s. Limited liability makes passive investment more attractive. Any investor knows exactly how much money can be lost – the amount invested.

Management Severable From Ownership

The vast majority of corporations in the US are managed and run by their shareholders. This is true because most corporations are small, closely held companies with a small number of shareholders. At the same time, we are all aware of the giant corporations like Google and AT&T. When corporations grow beyond a certain size, the corporate form allows for management to be separated from ownership. This has various economic advantages including bringing managerial expertise and professional skill to the running of the business and eliminating some “emotional” elements from business operations. While the separation of management from ownership can create conflicts, the focus on profit maximization and the elimination of sentiment can make passive investment more attractive.

Free Transferability of Shares

Another important feature of modern corporations is the free transferability of shares. This makes passive investment more attractive because any given investor can “exit” by selling his or her shares. This is particularly true for large corporation where there is a “market” for the shares. Aside from being able to sell the shares, shares can be assigned and be collateralized by lenders and creditors. Moreover, the rights attendant to the shares (voting rights) can also be transferred and assigned.

Contact San Diego Corporation Law Today

If you would like more information about corporations generally and/or want assistance with forming a California corporation, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” three years running by and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard has the experience to help you form any type of corporate entity. Every business needs a skilled and dedicated business attorney like Mr. Leonard. Mr. Leonard can be reached at (858) 483-9200 or via email.

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