A Basic Overview of Corporate Law Principles

Separate from criminal and civil law, corporate law runs on a different set of principles and laws. While the law recognizes a corporation as a single entity, just as a person is a single entity, corporations are also subjected to strict regulations. Because they enjoy tax breaks and other concessions, businesses must also answer to the government and the public with a higher level of responsibility.

Common Terms in Corporate Law

  • Corporation – This is an entity formed for the purpose of doing business. A corporation can either be private, where shares of the company are not traded on an exchange, or it can be public, which allows for stocks, or shares in the company, to be traded on the public stock market.
  • S Corporation – This is a corporation that has a predetermined and limited number of shareholders. For these companies, stock options are not openly available.
  • Piercing the Corporate Veil – In a case where a corporation has committed wrongful acts, this is a judicial act that makes the owners, officers, and shareholders of the company liable for those acts.
  • Chief Executive Officer (CEO) – Appointed by the Board of Directors, the CEO is responsible for the day-to-day operations of the business.
  • Board of Directors (BOD) – A committee, usually elected by shareholders of the corporation. The Board of Directors manages the company’s long-term goals and dealings, including the appointment of officers.

The Heart of the Corporation

This might be said to be the Board of Directors, as the BOD functions to ensure the continued prosperity of the corporation. As such, each board member is entrusted by the shareholders to act in the best interests of the company, whether or not those interests benefit the members of the board. The company must come first.

For instance, the board of directors can’t vote to provide themselves with a raise without cause. A significant pay increase to the board members would put undue strain on the company as a whole and, therefore, would go against the board’s duties.

Likewise, the board of directors can’t act to benefit certain shareholders. The goal is to keep the corporation functioning and operating at a profit for everyone who holds an interest in the company. This is true even where certain shareholders elected an individual to the board. There remains a moral obligation to adhere to the corporation’s best interests.

Liability in a Corporation

Officers of a corporation enjoy the benefit of limited liability, which means they can’t be forced to use their personal assets to pay damages in a lawsuit. For instance, if there’s a $100,000 award in a personal injury lawsuit, the CEO can’t be forced to sell his home to cover that expense. Only corporate assets can be used in this way, so individuals only risk losing the money they have invested in running the business.

In some cases, a corporation owner’s personal assets are not protected. When the personal acts of the corporation’s owner causes the harm, he or she can be held personally responsible. Additionally, if the owner personally guarantees a transaction, such as a loan or the payment of a debt, and that transaction fails, the owner can be held personally responsible.

Other instances that open up the owner of a corporation to personal liability include failing to deposit funds withheld for tax purposes or purposely committing an act of fraud. Similarly, failing to maintain the business’s corporate status will subject the owners to personal liability. Likewise, any illegal act, particularly in cases where it results in injury to another person or harm to the company, can open up the owner to personal liability.

When a corporation faces a legal battle, either due to the release of a sub par product or the actions of one of its officers, it requires the services of an experienced corporate lawyer. Legal actions are modern battlefields and it takes a sharp mind to defeat a threat to the corporation’s survival. According to Andrew Gordon, a corporate attorney, corporate legal advice is advised at every stage of a business. From business formation to liquidation, there are significant pitfalls that could cost a corporation without sound legal advice.

Whatever challenges your corporation is facing, enlist the help of an advocate that knows your company’s needs. Together, you can work together to ensure your continued security as an officer of your corporation.

Adam Richards

About Adam Richards

Adam Richards is a semi-retired business professional originally from Bangor, Maine. He spent the majority of his career in sales and marketing where he rose to the marketing lead of a Fortune 1000 company. He then moved on to helping people as a career counselor that specifically helped bring families to self-sufficiency through finding them rewarding careers. He has now returned to Bangor for his retirement and spends his free time writing. This blog will be about everything he learned throughout his career. He'll write on career, workplace, education and technology issues as well as on trends, changes, and advice for the Maine job market and its employers.