A corporation is a legal entity separate from a person that is created under state law. Generally, articles of incorporation along with fees must be filed in most states with the secretary of state. These articles contain important information regarding the corporation and usually, such provisions always take precedence over the corporation’s by-laws.
Both the articles of incorporation and the by-laws of the corporation are extremely important documents that the corporation must follow. They must be followed in order to stay in good standing with the secretary of state, but also to make sure the state’s charter of granting the corporation limited liability stays current.
If these documents don’t contain the necessary information, it can result in significant negative consequences to the owners of the corporation. Classes of stock, dilution of shares, tax status, distribution of profits, ownership characteristics, who makes what kinds of decisions, how corporate shareholders can protect their ownership, may all be included in the articles of incorporation and by-laws of the corporation. In addition, if two or more owners a buy-sell agreement between the shareholders is a must.
The corporation is a legal entity with responsibilities and rights that are totally separate from its owners. Thus it is important these documents have not been prepared properly.
Corporations are generally recognized as a person both under federal and state law. Corporations are entitled to many of the same constitutional protections as individuals. A corporation can sue and be sued. A corporation is not able to take advantage of the privilege of self-incrimination under the fifth amendment.
The corporation has different groups. It has shareholders, a board of directors, and its managers who are generally called officers and they all have different responsibilities and duties. One of the distinct advantages of a corporation is the separation of ownership and management. Other groups include employees, though they are not part of the legal structure of the corporation.
Shareholders do not control the day-to-day control or management of the corporation.
In addition, their inspection of the corporation’s books and records is generally limited.
Generally, the board of directors and officers are immune from liability, as long as they make honest mistakes in judgment. There just must be a reasonable basis for their decisions. For example, a decision not to carry adequate liability insurance for the corporation may not be a reasonable decision so directors and officers must be prudent or may be held liable for negligence.
Also, directors have a fiduciary duty of loyalty to the corporation before their own interest.
Certain professional corporations, have to have separate approval by their professional state agency in order to incorporate. Their requirements are different. These types of corporations usually do not have the limited liability to the professionals that owners of regular corporations have.