Corporate Law (Part 1 of 3) (Part 2): Inception of the Corporation: Formation, Limited Liability, and Capital Structure

Corporate Law: Inception of the Corporation

Why Choose the Corporate Form?

Entrepreneurs, investors, and businesspeople choose the corporate form for several reasons. Limited liability is a primary factor, as it protects shareholders' personal assets from business debts and liabilities. Perpetual existence ensures continuity even with changes in ownership or management. Centralized management, with a board of directors overseeing operations and officers handling day-to-day tasks, provides structure and expertise.

Legal Formation of a Corporation

A corporation is formed by filing articles of incorporation (or a certificate of incorporation) with the relevant state authority. This document includes the corporation's name, purpose, authorized shares, registered agent, and sometimes initial board or incorporator details. Delaware is a popular jurisdiction due to its established corporate law and court system.

Limited Liability and the Corporate Veil

Limited liability encourages investment by shielding shareholders from personal liability for corporate debts. However, courts can pierce the corporate veil and hold shareholders personally liable in cases of fraud, commingling of funds, or disregard for corporate formalities.

Corporate Governance: Bylaws

Bylaws outline the corporation's internal governance, including procedures for director elections, board meetings, officer roles, and shareholder meetings. Bylaws are typically adopted at the initial organizational meeting and can be amended by shareholder or board vote.

Capital Structure at Inception

A corporation's capital structure consists of authorized shares, which can be common stock or multiple classes with different rights. Par value is a nominal value assigned to shares, but it is often symbolic in modern practice. Shareholders become owners of the corporation by purchasing stock.

Authorized vs. Issued Shares

Authorized shares are the maximum number of shares a corporation can issue, as stated in its articles of incorporation. Issued shares are the shares that have been sold to investors.

Key Concepts for Bar Exam and Law School

Understanding the reasons for choosing the corporate form, the formation process, limited liability, corporate governance, and capital structure is essential for success on the bar exam and in law school. Common exam scenarios include issues related to bylaws, piercing the corporate veil, and share issuance.

Summary

Corporations offer limited liability, perpetual existence, and centralized management. They are formed by filing articles of incorporation and governed by bylaws. Capital structure includes authorized and issued shares. Understanding these foundational elements is crucial for navigating corporate law.