BUSINESS LAW 101
Corporations have same
rights, liabilities as person
The corporation is a legal entity, with the same rights as a person. This means the corporation can be held liable as if it were a person; it can sue and be sued; it can commit crimes and be punished; it can enter contracts and own property; it can incur debts and borrow money.
Because it is a separate and legal entity from its shareholders, ownership may be transferred without affecting the rights and obligations of the company or other shareholders. In other words, if my company enters into a contract with John Smith and then I sell my stock to Bob Jones, the contract with John Smith is still valid. John cannot cancel the contract simply because I am no longer involved. The contract is with the company, not with me.
A corporation is a creature of statute. It is created by filing Articles of Incorporation with the Department of State. These Articles set forth the name of the company, the physical and mailing address for the company, and how many shares of stock the corporation may issue. The name of a corporation is important. Only one corporation may use any given name.
There are several types of corporations:
Public Corporations: local governments are public corporations. They are established to run governmental purposes. Cities are public corporations; towns are not.
Quasi-public corporations: private companies that provide public utilities, for example, many power companies are Quasi-public corporations.
Public Authority: government created companies to provide services to the public, such as a Housing Authority.
Non-profit corporations: organized for numerous purposes, but are not intended to earn a profit for shareholders.
Private corporations: These are companies that are operated for private gain of their shareholders. Private corporations can be divided into many categories:
Domestic corporations: Any corporation formed in the state where it is doing business is considered a domestic corporation.
Foreign corporations: Any corporation formed in one state and doing business in another.
Special service corporations: formed to provide a special service, such as banking, insurance or transportation. These corporations are usually subject to special codes and statutes.
Subchapter-S corporations: this is a special creature of the internal revenue code. It allows small corporations to avoid double taxation. We will discuss this in a later article.
Professional corporations: corporations to provide professional services such as lawyers, doctors or accountants.
One of the few differences between a corporation and an individual is one of representation. While an individual is allowed to represent themselves in court, a corporation must be represented by an attorney (except in small claims court). Also, a corporation has no right to do business in a foreign state. A state may exclude foreign corporations, or may charge special fees for a foreign corporation to do business in that state.
The main benefit of a corporation is the protection of liability. In most cases, the shareholders’ only liability is the extent of their investment in the corporation. This is not absolute. There is legal doctrine called “piercing the corporate veil” which allows a court to disregard the existence of a corporation and chase after the individual shareholders. This requires that the court make special findings to show that the corporation is really just a sham to hide assets of the owner. This court can do this by determining whether the corporation maintains adequate records, whether there has been a co-mingling of funds, whether there has been a diversion of the corporate assets by the shareholders, or whether the corporation was created to evade a debt or to perpetrate a fraud.
What happens when two companies want to join together, or one company wants to take over another? There are a few ways to handle this.
First is a consolidation. This is where the two companies cease to exist and a new company emerges. Years ago there were two major labor unions – the American Federation of Labor and Congress of Industrial Organizations. These two groups consolidated to form the AFL-CIO.
Second is a merger. This is where one company becomes part of another company. Several years ago there was a merger between NationsBank and Barnett Bank. NationsBank was the surviving company and Barnett Bank no longer exists.
Third is the conglomerate. This is where a larger company makes a smaller company a subsidiary. Both companies continue to exist, but one dominates over the other. An example is Pizza Hut and Pepsi. Several years ago Pepsi bought Pizza Hut. While both companies continue their existence, Pepsi is considered the parent organization of Pizza Hut.
Another way companies can join is through an asset sale. This is where one company buys another company’s assets, but does not take over the company’s debts. This allows the purchaser to operate the new business free and clear.
Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.
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