Separate Entity

For legal purposes, a corporation is considered a separate legal entity from those forming it. Although it is not a living person, a corporation generally has the same rights. It can own property, enter contracts and claim constitutional rights. Unluckily, a corporation also must pay taxes like you and me.

Unlike each of us, a corporation can “live” for 100 years, 200 years or more. Certain forms of corporations were known to exist as far back as in the days of Ancient Rome. Despite it's gladiator tendencies towards other companies, Microsoft was not the first corporation.

State of Incorporation

These days, state law authorizes and governs the creation of corporations. In 1811, New York was the first state to pass laws authorizing corporations. As other states were created, the passage of laws authorizing the corporate enitity became standard practice. Today, corporations can be formed in every state.

The Secretary of State for each jurisdiction typically controls the incorporation process. Corporations are “residents” of the state in which they maintain offices, have employees, receive mail, etc. This is true even if it conducts business in other states.

A corporation is considered a “domestic entity” in the state in which it is incorporated. In all other states, it is considered a “foreign entity.” For example, a company like Nomad Journals is a domestic corporation in Colorado, where it is based. When I buy a travel journal from it, California authorities may consider it a foreign corporation and require it to conform to California law. Foreign corporation status is a technical area of law and well beyond the scope of this article. Nonetheless, just keep in mind that the state of incorporation can be a key issue, particularly when it comes to tax issues.

Limited Liability Corporation

Ah, the good stuff. The primary benefit of using a corporation is the limited liability advantage. Since it is considered a separate entity from shareholders, a corporation creates a barrier between corporate liabilities and the assets of shareholders. The only risk shareholders take is the loss of their investment in the corporation.

Assume I own a home worth $800,000 in San Diego and invest $10,000 in a new business. The business is incorporated in California and is going to dominate the VHS tape market. Alas, my fortune teller apparently had an off day when she told me to invest and the company goes bankrupt in six months. I will lose my $10,000 investment, but not my $800,000 home. If the business had been formed as a partnership, I would lose the investment and some or all of my home depending on the business debts.

In Closing

Considering it was originated in the distant past, the corporate entity is still remarkably relevant in modern times. Although the proliferation of the limited liability company has taken some wind out of the sails, the corporation remains a staple of the business environment.