Where do corporations get their authority to operate?

The law of each state gives people the opportunity to operate a business in one of several different legal structures or forms. Each form has its own advantages and disadvantages depending on the individual circumstances of the owners.

The most basic and simple form is the sole proprietorship, which involves business ownership by one person or in some cases by husband and wife. Other forms include a partnership, limited partnership, regular or C corporation, S corporation, Limited Liability Company (LLC) or Limited Liability Partnership (LLP).

Corporations have sometimes been called legal fictions, meaning they exist only because the state law authorizes their existence. Corporations were first authorized by state laws to provide a form of doing business where a person could invest money in a business venture without subjecting their personal assets or property to liability.

Corporations are considered legal entities, separate and apart from the shareholders or people who own them. Thus, if a corporation is sued and the court rules against the corporation, the law allows the judgment holder to satisfy the judgment (get paid) only from the assets or property of the corporation and not the private property of the individual shareholders.

This corporate attribute is called limited liability protection. In a sole proprietorship or partnership, a judgment can be satisfied from the personal property of the individual owners of the business if there are insufficient business assets to satisfy the judgment.

Not only do corporations owe their existence to state law, but they are also governed and regulated by the corporate laws of the state in which they are incorporated and/or in which they choose to do business.

Note: If a corporation sells stock, it may also be regulated by state and federal security laws.

The corporation laws for many states can now be found online. If you need to review the corporate law in your state, the following sources may help.

For more information on state laws visit:
http://www.findlaw.com/11stategov/or/laws.html