A corporation is an entity created to perpetuate an enterprise under the cover of liability protection by pooling wealth. Corporations are legal entities separate from their members, owners or shareholders. A corporation is an artificial legal person, which can hold property, enter into contracts or sue or be sued in its own name.
Though a corporation is owned by shareholders or members, yet it is controlled by the board of directors. Since it is not a feasible proposition for the shareholders to directly manage the corporation, they elect the board of directors to manage the corporation on their behalf.
The shareholders or members of a corporation enjoy the protection of limited liability. They are not personally liable for the debts and obligations of the corporation. Their liability is limited to the amount unpaid on their shares of stock, if any.
In exceptional circumstances the state authorities can pierce the corporate veil in disregard of the separate corporate entity to prevent grave injustice, inequity or fraud. Instances of such exceptional case include the use of the corporate veil to defraud the creditors or revenue authorities.
As a separate legal entity, a corporation enjoys certain powers and rights given by the document of its incorporation and the bylaws.
Corporations are governed mainly by state laws. Relatively smaller states that have not developed their own corporate jurisprudence have adopted the Model Business Corporation Act developed by the American Bar Association. Larger and commercially important states like Delaware, California or New York have their own corporate laws with inputs from different sources. The Delaware General Corporation Law has the reputation of being the most business friendly corporation law. That is why most of the Fortune 500 companies are domiciled or incorporated in Delaware. Nevertheless, it is advantageous for smaller companies to incorporate themselves in the state where they do most of their business.
Corporations whose shares of stocks are publicly traded must abide by federal securities laws like the Securities Act of 1933 and Securities Exchange Act of 1934. The Sarbanes-Oxley Act of 2002 has also new requirements on public corporations.
