What Is Corporate Law and When Do You Need to Consider it?
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Originally Posted On: What Is Corporate Law and When Do You Need to Consider it? | Pulchra
Despite 2020 being an incredibly jarring year for entrepreneurs, 4.4 million companies joined the business fray.
Many of these companies may have been formed in response to job losses and trying to find a means to keep going. Regardless, these firms represent new owners of corporations entering the market and needing corporate law assistance.
If you’re wondering, “What is corporate law?” Here’s a primer to help you understand the nature of corporate law and why you need to consider it.
What Is Corporate Law?
At its essence, corporate law refers to the branch of law that handles legal matters impacting corporations. Under corporate law, one can address the corporation’s issues and not necessarily the people making up that corporation.
What Is the Difference Between Corporate and Commercial Law?
Many people end up confusing commercial law with corporate law. Understandably so, these two terms can seem to overlap. However, there is a clear distinction, and it all boils down to grasping the fundamentals of business entities.
Commercial law deals with everything related to the sale of goods and services in the marketplace. On the other end of the scale, corporate law handles issues to do with the corporate business entity.
For example, if you are setting up a business and are considering registering as a corporation, the folks at Freedom Law encourage you to consult a corporate attorney.
That way, you will have a deeper understanding of the nuanced dynamics that come with operating as a corporation. You’ll thus be able to determine better if a corporation is the most optimal legal entity for your new business.
If, on the other hand, you need legal counsel on a commercial transaction you plan to execute, talking to a commercial lawyer would be the right move for you.
What Makes Up a Corporation?
If corporate law deals with issues affecting the legal entity, it’s only wise to take a step back and get a deeper view of a corporation.
A corporation is either a collection of people or a company banding together to run as a separate legal entity for conducting business affairs. The resulting legal entity (known as the corporation) then issues shares that you can purchase to own a piece of the action (and be known as a shareholder).
A Corporation’s Characteristics
Without having specific features that deliver critical benefits to owners, the corporate structure would be a complex maze best avoided. However, there are unique features that draw entrepreneurs to this form of legal business entity.
It is also these salient features that generate tensions and complexities that corporate law steps in to solve. They are:
1. Legal Personality
Under this feature, a duly registered corporation becomes a separate organization from its owners. The law recognizes this separate entity as a different organization from those who own it. In legal jargon, this is known as ‘separate patrimony.’
What does that mean?
Any resources that owners and investors sink into the corporation will now belong to the firm and not the owners/investors. The corporation will have the sole right to utilize these resources independent of the owners/investors.
Specifically, the corporation has full rights to determine how to use such resources, whether to sell them or offer them to creditors for attachment.
Furthermore, the shareholders can’t take out their investment at will. In the event that creditors come for the firm’s neck, their debts will have higher priority than a shareholder’s personal debts to a creditor.
All this serves to protect the assets held under the corporation’s name from creditors coming after a shareholder’s personal assets.
2. Limited Liability
Limited liability is perhaps one of the most attractive aspects of a corporation to entrepreneurs. Since the corporation is a separate legal entity, those who own or invest in it are only liable up to the extent of their investment or ownership.
If someone decides to sue the corporation, the owners and investors won’t be personally liable.
In such a scenario, only the corporation’s assets will be at risk. That protects the assets shareholders own from falling under the creditor’s claim that the corporation owes money to.
Limited liability is vital in helping corporations enhance their financing prospects. For example, a firm can decide to incorporate different subsidiaries and use each subsidiary’s assets to raise debt.
3. Transferable Shares
Whenever a shareholder decides they no longer want to be part of the corporation, the business does not need to close its doors. Such a shareholder can transfer their ownership stake to an interested party. Of course, such a transfer needs the approval of other current shareholders.
Being able to transfer ownership of a portion of the corporation without adversely affecting the firm’s longevity helps keep it as a going concern. In turn, that strengthens the corporation’s creditworthiness.
4. Delegated Management Featuring a Board
Every corporation runs its operations according to a proven organizational structure.
At the very top of this structure sits a board of directors. The board oversees the running of the organization through recruiting and supervising officers.
Corporate boards can be split into single-tier or two-tiers.
In two-tier boards, senior officers are part of the secondary management tier and are separate from the board’s primary supervisory tier. In stark contrast, a single-tier board features the corporation’s officers.
The shareholders recruit the board of directors. Despite this fact, the board is still distinct from the shareholders and supervises the officers who oversee the day-to-day operations.
5. Investor Ownership
Any corporation owner has the right to exercise a level of control within the firm and participate in the profits. With that said, investors still don’t have a hand in the direct running of a corporation despite their decision-making rights.
The rights investors and owners exercise in a corporation are directly proportional to the stake they hold in it.
When Should You Consider Turning to Corporate Law?
Just as there is a wide range of areas that generate complexities and conflicts within corporations, so are the number of issues corporate law can take up.
However, there are common issues that most corporations will face at one point or another, which you can resolve using corporate law. These include:
1. Mergers and Acquisitions
Mergers and acquisitions (M&A) are a staple of corporate life. They involve wholly buying the ownership of another corporation or merging separate corporations into a combined entity.
With M&A, it’s not just ownership and its attendant perks in question. It’s the liabilities each separate corporate carries as well. Corporate law helps owners navigate this process and manage its aftermath with minimal impact on the business.
2. Corporate Crimes
Many corporations inevitably find themselves in the crosshairs facing accusations of breaking corporate law. Examples include cases of fraud, antitrust claims, insider trading, etc.
When a corporation faces such charges, it turns to corporate lawyers to prepare and execute a legal defense.
Insolvency at a corporate level occurs once a firm is unable to settle its debts and liabilities. Corporate law offers remedies to such firms depending on the specific circumstances an organization faces.
For example, for some corporations, liquidation may be the most viable option, while others may slide into receivership. These are areas corporate lawyers are well versed in to help organizations find a viable solution.
4. Risk Assessment
At times, your corporation needs to figure out the risks it faces before realizing any liabilities. It’s not only about identifying a potential risk but developing a strategy to respond should it materialize.
Corporate lawyers understand the value of this kind of preparation and help the firm prepare for such an eventuality.
5. Sound Documentation
The sheer amount of paperwork involved in running a corporation can be challenging. Without proper input from corporate attorneys, organizations run the risk of not having thorough and well-maintained documents.
Business contracts and other legally binding documentation in a corporation need to go through a corporate lawyer’s hands. That way, the organization not only spies out potential problems but also enters into proper agreements and transactions.
The Impact of Evolving Corporate Ownership on Corporate Law
The types of corporate ownership options available today differ from those that emerged a few decades ago.
For example, lately, there has been a lot of furor about Special Purpose Acquisition Companies (SPACs). Despite SPACs being around for several years, the business community has been keen to take them up only in recent years.
To protect investors and entrepreneurs, corporate law has to evolve in developing relevant SPAC guidelines, rules, and regulations. And SPACs won’t be the end either.
As the market and entrepreneurs innovate corporate ownership, corporate law will have to keep pace if it’s to safeguard corporations and their owners.
Pursue Corporate Compliance
Whether you’ve worked with corporations for a long time or only recently started one, you need a healthy dose of compliance. Understanding and acting on corporate law will help keep your firm on the right path.
Spend time asking the question, “What is corporate law?” As the answers keep evolving, your organization needs to keep up to flourish.
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