Corporate law encompasses the body of rules, regulations, laws, and practices pertaining to the incorporation and operation of corporate entities.
It is the body of law that governs legal entities that are in existence to conduct business. These laws set forth the rights and duties of all individuals involved in the formation, ownership, operation, and management of a corporation.
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What Constitutes a Corporation?
A legal entity that is in existence to conduct business is known as a corporation. This legal entity is distinct from the people who create it. Just like a person, a corporation can also carry out business in its own name. The ownership of a part of the corporation by a person limits their liability to their ownership in such a corporation. They cannot lose more than they have invested in the corporation.
Primary Characteristics of Corporate Law
Corporate law is based on the following five principles:
- Legal Personality
Owners of a corporation pool their resources into a distinct entity. This entity can utilize the assets as well as sell them. It is not easy for creditors to re-gain these assets. Rather, they incorporate their own separate entity that acts on its own accord.
- Limited Liability
In case a corporation faces a lawsuit, only the assets of the corporation are at-risk. The plaintiff cannot bring the personal assets of the owners of the corporation into the dispute. This limited liability of the corporation’s owners allows them to assume risks and diversify their investments.
- Transferable Shares
A corporation does not have to cease to exist merely if an owner no longer wants to retain a share in the corporation. A unique feature of a corporation is that its owners can transfer their shares without the same challenges that accompany the transfer of ownership of a partnership. They may be a limitation on the method of transfer of ownership. However, the ability to transfer ownership enables the corporation to continue to exist even when the owners want to exit.
- Delegated Management
There is a defined structure which guides how corporations conduct their activities. There is a board of directors as well as officers. The decision-making authority is shared and split between these groups. Board members are responsible for hiring and monitoring officers. They also evaluate their major decisions. The shareholders of a corporation will elect the board.
This defined structure of leadership allows parties that conduct business with the corporation to be assured that the actions of the board of directors and officers are legally binding on the corporate entity.
- Investor Ownership
While owners do have a say in the decision-making of the corporation, they do not operate the company directly. Furthermore, investors are entitled to the profits of the corporation. The owner usually has the authority to make decisions and a share of profits according to their ownership interest. Owners usually vote to elect the board.
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