Question

What is a corporation and how is it formed? Do directors, shareholders, and officers of a corporation have liability for the company?

Answer 1

Corporation : A corporation in the legal aspect refers to an organization - a group of individuals, or a company which can be a for-profit firm or a not-for profit organization as well, but acting as a single entity and acknowledged by law. The important feature of a corporation is that it is a separate legal entity which is distinct from its owners and hence, it enjoys responsibilities similar to that of an individual. It can enter into contracts. loan and borrow money, sued and be sued, own assets etc.

Creation of a corporation : A corporation is created when shareholders combine their resources for a common goal which could be for-profit or for non-profit. They have an ownership (share) in the common stock. The recognition of a corporate is legalized through registration in most jurisdictions and regulated through corporate laws. For the United States, the United States corporate law regulates the power and the governance of corporations. Many states in US follow the Model Business Corporation Act (MBCA), which lay down the provisions to the corporation's liability.

Liability : The Model Business Corporation Act in USA follows the "Limited Liability" model which defines that the liability of an individual in a corporation is limited to their ownership share in the corporation. The MBCA states that if the agents are performing their duties in good faith, they cannot be held accountable for actions that result in debt or losses to the corporation, termed as liability that is limited behind the corporate veil. Hence, when a corporation enters in a contract, any actions of the directors and officers in interest of the corporation, do not hold them liable, assuming they are not involved in fraudulent, illegal actions or improper conduct. The limited liability of directors, shareholders and officers of a corporation depend on the role assigned to them.

Directors : The directors are the board of individuals who govern the corporation. They are elected by the shareholders of the corporation and their main task is to manage the affairs of the corporation and delegate responsibilities. The directors of the corporation have a fiduciary duty to act in the best interest of the corporation, with loyalty and within the confines of the legal norms. On any violation of this duty, the directors can be sued by the shareholders and can be personally held liable for damages to the corporation.

Officers : Corporate officers such as the President, Vice Presidents, Secretary and Treasurer, are the agents of the corporation and have the task of negotiating contracts to which the corporation is legally binding. Officers, similar to directors have fiduciary duty to act in the best interest of the corporation and may be held personally liable for the actions against the interest of the corporation.

Shareholders : Shareholders of a corporation are the investors to the corporation and have an ownership in the stock known as the share of stock. The rights enjoyed by shareholders of the firm are the right to vote, to elect the board of directors, or change the bylaws, or the right to inspect corporate records. Shareholders receive a return in percentage of their contribution that is called the dividend. The liability of a shareholder is limited to their share in the corporation.