Corporate Law: The Basic Principles

When you turn on the TV, you’d think that every corporation out there is engaged in a money laundering scheme or a complicated plot to swindle their investors out of money. In reality, at its basic level, corporate law tends to be one of the lesser complicated and adversarial branches of the practice of law. That’s not to say that the difficult to understand parts of corporate law aren’t complicated—they are—but it doesn’t take a rocket scientist to grasp its basic functions.

The Corporation as Legal Entity

If you were to engage in a legal contract with another person, say in the selling of a house, you would want a lawyer involved. When a corporation decides to buy or sell land, it needs a lawyer too—because in the eyes of the law, the corporation is a legal entity. It’s a “person,” in the sense that it has to pay taxes, it can own property, and it can sue others and be sued itself. Now you can begin to see why a corporation would need its own lawyer, to facilitate these contracts and other transactions.

The Concept of Limited Liability

Limited liability is another key concept in corporate law—heck, it’s why many corporations exist in the first place. It’s tied to the idea of the corporation as its own “person” or separate legal entity. Limited liability means an investor or owner of a company is only bound to that company by the amount they originally put into it, or some other fixed sum. If another business or person decides to sue the company, they can only get the money that investor put into it---not the investor’s home or personal wealth as well. You’ve surely heard the term “LLC” attached to a business; this means “limited liability company.”

Transferable Stock

In a publically traded company, investors receive shares of that company that are usually traded on a listed stock exchange. This idea, that the public can own part of a company simply through investing in it, helps companies gather capital and spread the wealth of the company beyond the board of directors. As the shareholders have provided the capital for a company, the corporation is bound to act in those shareholders’ best interest; corporate governance is in charge of ensuring that this happens. Corporate malfeasance, as was alleged in the cases of Enron, MCI Worldcom, and others, happens when corporate governance doesn’t work in the best interest of the shareholders, but others involved in the company.

A Delegated Corporate Management Team

Since the number of stockholders of a particular company may be in the thousands, it is clearly not feasible for every one of them to have a hand in the day-to-day running of a corporation. Instead, this is delegated to an elected board of directors, who are in charge of appointing the company’s chief executive, approving budgets, and more.

 

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