What is a Legal Corporation?

Emma G.
Emma G.
Businessman giving a thumbs-up
Businessman giving a thumbs-up

A legal corporation is basically a legal construct created to protect individual business people from liability if their business fails. The business is granted the same rights and responsibilities as an individual. A board of directors acts as a representative for the legal corporation. The board and the corporation must follow the national corporate law of the nation in which the company is incorporated.

When a person starts a business, for example a florist shop, that person is responsible for all debts incurred by his or her business. The owner must pay taxes. If a loan is taken out to pay for a new refrigerator to keep the flowers fresh, the owner is responsible for paying back that loan. If the owner cannot pay the debts, his or her personal money, home, and assets can be seized as payment.

After a company becomes a legal corporation, the company is held liable, not any individual person. Owners of the company will still lose money if the company fails or defaults on its loans, but they can only lose the amount of money they have invested. The personal assets of the owners do not belong to the company and so cannot be seized as payment for its debts.

A company becomes a legal corporation by paying a fee and filing articles of incorporation with the government. This document outlines basic facts about the company such as its name, purpose, and the number of shares it can distribute. Shares are units of ownership in the company. If for instance the original owner of the florist shop is the only shareholder, he or she has 100 percent ownership of the company. If, however, he or she gives shares to employees as part of their yearly bonus, the employees then own a percentage of the company.

Shareholders do not just receive some of the profits from the legal corporation; they also have a say in how it is run. In many countries, corporate law grants shareholders the right to vote on changing corporation bylaws, approving or rejecting the sale of assets, and even dissolving the company. Shareholders also select and remove directors on the board of directors.

The board of directors acts as a representative of the corporation. The corporation is held liable for the actions of its directors, meaning that the legal corporation must adhere to any contract made by its board of directors and pay any debts incurred by the board on its behalf. The directors generally also have the power to elect officers, such as a president, treasurer, and secretary.

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