Corporate Law

• Author: Tina Kamakaris/Jane Kamakaris/Louis Kamakaris
• Pages: 451-458

451

Chapter 25 Corporate Law

CHAPTER 25

is chapter deals with the fundamentals of corporate law as they relate to corporations

as legal entities established to conduct business.

BASIC CONCEPTS

What is a corporation A corporation is a legal person created by law as a substitute

for a real person. Under the law, a corporation is a legal entity, separate and apart from its

owners who are the shareholders and who are protected against nancial loss by a concept

known as limited liability. In eect, a corporation is a legal creation, tangible enough

to be within the reach of the law, yet protected enough to promote economic growth

in a free enterprise system. As a legal substitute for a real person, a corporation can do

everything that a real person can do in operating a successful business, e.g. borrow money,

make contracts, operate a bank account, sue and be sued, and be held responsible for its

actions in the same way as a real person would be held responsible. Since corporations are

not human persons but have rights and obligations that are similar, the shareholders of a

corporation elect directors who are authorized to act on the corporation’s behalf.

Limited liability is means, if the corporation is in nancial trouble, the shareholders

(owners) would lose only the amount of money they invested in the corporation–their

liability toward any debts of the corporation is, therefore, limited to the amount invested.

Except in exceptional circumstances, the shareholders cannot lose property that belongs

to them personally, e.g. their houses or their cars. is gives the shareholders freedom to

invest in a corporation without fearing loss of personal assets. For a simple example, assume

that Homer created a corporation and bought one share of the corporation at $1. Homer’s

investment in the corporation is $1; if the corporation were to fail and become bankrupt,

the maximum that Homer would lose would be the one share, which would be equivalent to

whatever dollar value Homer originally paid for it, e.g. $1. e creditors of the corporation

are not allowed to seize any of Homer’s other possessions. us, we say that Homer’s liability

is limited to his shareholdings in the corporation. is is the meaning of limited liability.

Effects of limited liability Assume that you and John have one million dollars

between the two of you. You both decide you want to market “iggies” because you think

they are the coming fad; nevertheless, you are not willing to risk investing your full one

million dollars, but only $l00,000. If you were to set up a general partnership, your

creditors would seize your entire million, even though you invested only $100,000 in the

general partnership. If, however, you were to set up a corporation, Iggie Corporation, you

CORPORATE LAW

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