What is a corporation?

A corporation is a fictitious person. It is not a living, breathing human being, but it has all the legal rights of a U.S. citizen. For a corporation to be respected as a valid legal entity, however, it must have a legitimate business purpose, avoid commingling, and follow corporate formalities.

Corporations have been in existence for hundreds of years. Governments long ago realized that a person who starts a business creates jobs and, in general, stimulates the economy. However, before corporations existed, starting a business meant taking a terrible risk. If you went out of business, not only would all your personal wealth be exposed to business creditors, but you could go to debtor’s prison for a very long time! Therefore, governments allowed formation of corporations, which would limit the company owners’ liability to their capital contributions to the corporation. If the business failed, the owners would not be held personally responsible for corporate debts. As a result, people were more willing to start businesses, and therefore stimulate the economy.

In today’s world, corporations are generally most useful only as publicly traded companies, or as a private company planning to go public. Corporate formalities make corporations more cumbersome to operate than other business organizations, such as the LLC or limited partnership.  Combine this with the fact that an LLC can elect to be taxed as a C corporation, S corporation, partnership, or an entity disregarded from its owner for tax purposes (a.k.a. a “disregarded entity”), and corporations become even less desirable to the small and medium sized business owner.

Furthermore, corporations do not benefit from charging order protection. This means that if a stockholder is sued, a creditor can seize the stockholder’s stock (stock is a unit of ownership in a corporation). If the creditor seizes 51% of a corporation’s voting stock, he may then vote to liquidate the company, and then seize all liquidated corporate assets in order to satisfy his claim!

Related Links:

• What is the difference between a C and S corporation?

• Should I use a trust, LLC, limited partnership, or corporation?

• Why does my asset program need a demonstrable purpose other than asset protection?

• How might a creditor pierce the veil of my asset protection structure?

• What does it mean to commingle assets?

• What are corporate formalities?

• What is all the hype about Nevada corporations? Is there any substance to this hype?

• What are the tax consequences of various asset protection structures?

• What are corporate by-laws? Why are they important?

• What are state franchise (and other similar) taxes? How might I avoid these taxes?

• What government forms need to be filed if I stay onshore?

• What is an IBC?

• What are corporate bearer shares? Do they really work?

Relevant Case Law:

Garcia v. Coffman 124 N.M. 12, 946 P.2d 216 (N.M.App. 1997)