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What Is Corporate Law?

Corporate law refers to the body of laws and regulations which govern how corporations are formed, as well as their interactions with other companies, individuals, and the public. These laws address the rights and responsibilities of all people who are involved with the operating, owning, and management of the corporation.

Before continuing to discuss corporate law, it is helpful to first discuss what exactly is a corporation. A corporation is a specific type of business structure that is created and regulated by state law. More specifically, a corporation is defined as a legal entity that is separate from its owners, or, its shareholders. What this means is that only the corporation itself can be held liable for corporate obligations, such as maintaining certain business records.

Generally speaking, a corporation is classified according to specific factors such as:

  • Their tax structure;
  • The purpose of the corporation; and
  • The number of shareholders and amount of stock to be issued.

Some common forms of corporations are:

  • C Corporation;
  • S Corporation;
  • Non-Profit Corporation;
  • Business Corporation;
  • Professional Corporation;
  • Foreign Corporation; and
  • Public or Private Corporation.

However, the term corporation generally refers to the two main categories that corporations are divided into according to tax laws: C Corporations, and S Corporations. The defining difference between these two types is that C Corporations are taxed separately from their owners, while S Corporations are not.

Some other characteristics of corporations include:

  • Decreased or limited liability of members of the company, as previously mentioned;
  • Separate legal personality of the company, which means that a corporation may be treated as an “individual” for some purposes;
  • Different rules regarding stocks and ownership of the company;
  • Increased rights and responsibilities of directors and other leaders; and/or
  • Preferential tax treatment, in some states.

As such, corporation law clarifies how a company can become a corporation, and how corporations are allowed to participate in the economic marketplace. Corporation law may also be referred to as “company law” or “corporations law.”

How Are Corporations Formed?

Corporations are generally created by complying with state corporate laws. Most states base their laws on a model act, the Revised Model Business Corporation Act (“RMBCA”).

A corporation is formed when articles of incorporation are filed with the Secretary of State. In order to form the articles of incorporation, the individual owners or shareholders must agree on a number of factors, which include but may not be limited to:

  • The name of the corporation;
  • The number of shares that the organization is authorized to issue;
  • The number of shares of stock that each owner will buy;
  • The amount of money each owner will contribute to the purchase;
  • The specific type of corporation; and
  • The people who will form and manage the corporation.

As each state has its own corporate law requirements, there may be additional factors to include when forming a corporation.

What Are Some Of The Most Common Legal Issues Addressed By Corporate Law?

Corporate laws involve a wide variety of legal issues associated with the creation and operation of corporations. These can include:

  • Incorporation and filing processes, such as creating bylaws and other corporate formalities;
  • Securities issues, such as those involving stocks, shareholders agreements, and other investments in the company;
  • Member liability;
  • Rights of the board of directors, as well as other key figures;
  • Disputes between corporations and other businesses;
  • Business mergers and takeovers; and
  • Dissolution or termination of a corporation.

Legal issues associated with corporate law can affect many different parties. Although corporations are considered to be individuals for legal purposes, legal issues associated with a corporation can affect the board of directors and company workers, as well as consumers and many other people.

To simplify, there are five principles commonly associated with corporate law:

  1. Legal Personality: Corporation owners may combine their assets into a separate entity, which can use and sell those assets;
  2. Limited Liability: This theory applies to when the corporation is sued; only the corporation's assets are available for the plaintiff, and not the personal assets of the corporation's owner(s). This limited liability is what allows corporation owners to take risks in order to diversify their investments;
  3. Transferable Shares: If a corporation's owner no longer wants their share in the corporation, that owner can transfer their shares instead of shutting down the corporation entirely. This transfer is easier in comparison to a transfer of ownership in a partnership. However, it is important to note that there are limits associated with how corporate shareholders can transfer ownership;
  4. Delegated Management: The authority to make decisions regarding the corporation is shared between the board of directors, as well as its officers. Board members are responsible for hiring and monitoring officers, while shareholders elect the board members. The intention here is that no one person has too much power over the corporation, thereby eliminating potential legal issues associated with abuse of power; and
  5. Investor Ownership: While corporation owners have the authority to make decisions, they do not actually run the company. Rather, owners generally make decisions and share profits proportional to their ownership interest.

Corporate laws exist to keep all corporations operating fairly. Essentially, these laws and regulations exist to ensure that corporations behave in generally predictable ways that others can rely on.

How Are Corporate Law Disputes Resolved?

Disputes may arise when shareholders disagree with each other, or when corporate law is violated in some way. Corporate law disputes frequently involve a considerable amount of assets and resources. These legal disputes are generally resolved through:

  • A damages awards to pay for economic losses, loss of business reputation, and other similar costs;
  • Remedies related to a breach of contract claim;
  • Court orders to alter corporate practices and policies; and
  • Changes in the company's leadership or management structure.

Generally speaking, corporate law is civil law. What this means is that when disputes arise, the corporation's officials should be able to go to the appropriate civil court in order to resolve its issues. However, it is not uncommon for those involved in a civil law matter to resolve the issue on their own. They may agree to settle and come to a compromise in order to avoid going to trial, and potentially losing the case. Civil settlements generally involve the defendant paying money to the plaintiff, and may result in an enforceable judgment.

In some cases, corporate law disputes may result in criminal consequences, especially for issues such as insider trading or other securities violations. Securities are financial instruments representing some amount of financial value. They generally take the form of a certificate that grants the holder rights associated with the profit distributions of a business. A few common examples of securities include stocks, bonds, and notes.

The legal penalties for securities violations can be considerably severe, as even minor violations can lead to criminal misdemeanor charges. Criminal misdemeanor charges are punishable by a fine, and/or jail time. More serious violations can lead to felony charges. An example of this would be if the violation involved falsifying tax information.

Many types of securities violations can also result in a civil litigation claim. It is not uncommon for the holder of securities to file a lawsuit against a trustee who has failed to manage security assets according to their duty of care. The trustee may then be required to pay damages in order to compensate the plaintiff for their economic losses.

What Are Corporate Bylaws?

Corporate bylaws are the set of rules that govern a corporation's operations. They are legally enforceable as a contract among the members of the corporation. A typical set of corporate bylaws will define important matters, such as how the corporation is to be operated, as well as the leadership roles of board members and corporate officers.

State laws vary widely concerning corporate bylaws. Usually the bylaws are mentioned in state laws as part of the “corporate formalities checklist” that a business needs to satisfy in order to register as a corporation with the state. However, keep in mind that corporate bylaws, often simply referred to as by-laws, are important to the efficient operation of any corporation. They help to prevent legal disputes and can provide guidance in the event that a dispute actually does arise. They establish solid procedures for the operation of a company.

Who Can Draft Corporate Bylaws?

The owners of a corporation can prepare its bylaws when they found the corporation. It is advisable, however, to work with an experienced business lawyer to complete this task. While corporate bylaw templates are available from many sources, these do not necessarily fit the corporation that the owners want to start. Owners should work with an attorney to draft bylaws that make sense for the company they wish to establish. At the very least owners who have prepared their own bylaws should have them reviewed by a business lawyer.

The bylaws become legally enforceable when a majority of the board of directors votes to adopt them.

What Should Be Contained in the Corporate Bylaws?

State law mandates the contents of corporate bylaws, but the exact requirements differ from state to state and from company to company. Typically they contain the following information:

  • Corporate officers – which corporate officers the corporation will have;
  • Responsibilities of corporate officers – the responsibilities of each officer are identified, as well as how they are elected and their term of office;
  • Board of directors responsibilities – the number of board members and their responsibilities; how they are elected, their terms of office, their general powers and how many must be present at a board meeting to establish a quorum. Specifying the way to remove or replace a board member is also recommended;
  • Extent of authority – the extent of the authority of officers and directors, for example, the value of contracts that officers can enter into on behalf of the corporation;
  • Identifying information – corporate bylaws should include the corporation's identifying information such as its name, address, principal place of business, designation of the corporation as public or private, and the term of its fiscal year;
  • Stock – the number, type and classes of stock shares that the corporation is authorized to issue; the bylaws might also specify restrictions on stock ownership or establish a right of first refusal, enabling a corporation to buy stock back from a departing shareholder;
  • Shareholders – information about shareholder meetings, including how shareholders should be notified of a meeting, shareholders' voting rights and procedures for voting by proxy,
  • Annual meeting – the date, time and location of the annual meeting, and requirements for notifying shareholders; every corporation must have at least one annual meeting, so this is an important part of the bylaws;
  • Special meetings – how to call a special meeting for a time and date different than regular meetings.
  • Committees – whether the board of directors will have committees and the procedures for setting them up, dissolving them and appointing and removing members.

A business that plans to sell stock or accept money from investors in the future should have a strategy for the structure of its stock offerings. This should be set out in the bylaws. Also, the bylaws should specify who qualifies as a stockholder and how stocks can be transferred between owners.

Some states might have a so-called “default” rule. A default rule is a rule that will apply if the bylaws do not specify something different on the subject of the rule. For example, a default rule might state that all profits should be evenly distributed among shareholders. Or, it might state that legal responsibility for a company's actions is evenly distributed among shareholders. The bylaws can avoid these rules and specify something different if the founding owners know about them and draft the bylaws competently.

The law in the various states may determine the way in which bylaws can be enforced and the consequences for violating the bylaws. Again, In some cases, bylaws can make provision for their enforcement that differs from the state provision.

This is another reason why a corporation's founders would want to consult with an experienced business lawyer when writing the bylaws. An experienced lawyer knows what state law provides regarding bylaws. They know when it would be advantageous and when it is allowed to include provisions that differ from state law.

What Happens When Corporate Bylaws are Violated?

Corporate bylaws are generally enforceable as a contract between the members of the corporation. Violations of corporate bylaws can have the following consequences:

  • Removal from office – members and directors can be removed from office for violating the bylaws;
  • Internal liability – members could be required to pay an award of damages for losses to other members of the the corporation, depending on the violation;
  • External liability – a member may become liable for losses that the violation caused because the corporation is liable to a third party;
  • Dissolution of the corporation – a corporation can have only a few shareholders who might also be active in running the corporation's day-to-day operations. If there is a dispute among them that cannot be resolved, a court might order the corporation to be dissolved;
  • Criminal liability – in some cases, violations of corporate bylaws can also involve criminal charges, which can lead to the imposition of fines and/or jail time.

Thus, corporate bylaws can also provide some protection from legal liability. They also impose accountability for the members of the corporation. For this reason, it is important that the bylaws be drafted by a business lawyer who is experienced with corporate bylaws and the role they play in a corporation's operation.

What Is Corporate Criminal Liability?

A corporation is an entity, something that exists only through its employees. However, a corporation can be vicariously liable for criminal activity unless it is a limited liability corporation (LLC). For example, a corporation can be criminally liable under these circumstances: 

  • The criminal act by the employee or agent was within the "scope of employment"
  • A statute(s) defines what crimes a corporation is liable for
  • Failure to perform an affirmative duty -Corporations must perform certain duties under the law. Failure to perform such duties can result in criminal liability. For example, a corporation will be guilty of tax evasion if it doesn't pay taxes.

How Can a Corporation Be Liable for Criminal Acts?

A corporation can be held liable for the criminal acts of it's employees as long as the employees are acting within the scope of employment and their conduct benefits the corporation. A corporation cannot be imprisoned or punished like individuals. However, there are ways to punish a corporation, such as: 

  • Heavy fines
  • Loss of business license(s)
  • Regulation by government agencies

When Does an Employee Act within the Scope of Employment?

To act within the scope of his or her employment, the corporate employee must have permission or the actual authority to act on the corporations behalf. A corporate authority who is acting within his or her corporate duties and engaging in corporate activities that is related to the corporation would be acting within the scope of their employment. If there is a rational relationship between the employee's criminal act and his or her corporate duties, then the corporation will be criminally liable for the employees conduct

If a Corporation Is Criminally Liable, Are Individuals Punished?

When a corporation is criminally liable, the responsibility also falls on individuals. The board of directors, officers, and other high-ranking officials will almost always be criminally liable as well (just look at the Enron fiasco). A individual can be held criminally liable for another employee's illegal act under the accomplice liability theory. If an individual aids, encourages, assists, or instructs another employee to commit or engage in a criminal conduct, they can also be held liable for the employee's criminal act.

Subordinates or supervisors who have a duty to look after other employees and know or should know that an employee is engaging in criminal conduct within the scope of their duties can also be held liable if they turn a blind eye and fail to take action to prevent the conduct.

What Are the Penalties for a Corporation Who Is Held Criminally Liable?

A corporate who is held criminally liable for it's employees criminal conduct may suffer financially and criminally. Everyone in the corporate entity may be held liable for the criminal activity including officers, directors, and the corporation itself. The penalties may include:

  • Revocation of corporate charter by state authorities
  • Civil penalties
  • Loss of government contracts
  • Shareholder suits
  • Permanent or temporary loss of deposit insurance, conservatorship, receivership.

Can an Attorney Assist Me with Corporate Law Issues? 

If you are involved in any sort of corporate law dispute or issue, you should hire an experienced and local corporate lawyer. An attorney can help you resolve your issue while adhering with the corporate laws of your state. Finally, an experienced attorney will also be able to represent you in court, as needed.

It is a good idea to establish a relationship with a good business lawyer early on so as to avoid problems later. Decisions on matters other than bylaws have to be made when a corporation is founded and a good business lawyer can advise you about these as well. You also want to have access to a lawyer who is familiar with you and your corporation in the event legal issues arise.

Laws governing corporate responsibility are different in every state. Which state laws are applied depends on where the company was incorporated. An experienced criminal lawyer can inform you of the local laws, your rights and defenses, and the best way to proceed in a criminal trial. If you were a victim of a corporation's actions, contact an experienced attorney to get compensation for your loss. 

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