Corporation

Definition and Meaning of a Corporation

Die Corporation is a corporate form with its own legal personality (Legal Entity), established in many countries, particularly in Anglo-American legal systems. The separation of ownership and management is central to the corporation, distinguishing it from other business entities. It is classified as a capital company and is frequently used for business purposes.

A corporation allows shareholders to participate in the company by acquiring and trading shares (Shares/Stocks), with shareholder liability generally limited to their investment. This results in a high degree of legal certainty and strong capital-raising capability.

Legal Classification of the Corporation

Separate Legal Personality

The corporation possesses an independent legal personality recognized by law. It can enter contracts, acquire or dispose of property, sue and be sued independently of its shareholders. This so-called ‘Separate Legal Entity’ is a central characteristic of the corporation.

Formation and Articles

The formation of a corporation occurs through registration (Incorporation) based on a founding document (Articles of Incorporation, Certificate of Incorporation). The formation documents typically include:

• Company name
• Purpose of the company
• Registered office of the company
• Number and type of shares
• Information on the structure of the Board of Directors

The internal rules of a corporation are laid down in the ‘Bylaws’, i.e., the statutes.

Limitation of Liability

Shareholders of a corporation are generally not personally liable for the company’s obligations. Their risk is limited to the invested capital amount. Creditors may only have recourse to the corporate assets. Exceptions particularly apply in cases of abuse of the corporate form (“Piercing the Corporate Veil”), for example, in cases of fraudulent intent.

Organs of a Corporation

Key governing bodies are generally:

• Board of Directors: The management body, responsible for strategic direction and oversight of management.
• Officers (e.g., President, Treasurer, Secretary): Entrusted with operational management.
• Shareholders: Owners of the company, influence through general meetings and election of the board.

Corporate Governance

The management and control of corporations are subject to strict rules of corporate governance. In particular, this includes:

• Transparency obligations
• Legal supervision of the governing bodies
• Conduct and fiduciary duties towards the corporation

Statutory frameworks and codes (including the Sarbanes-Oxley Act in the USA) are designed to prevent mismanagement and ensure investor protection.

Types and Variants of Corporations

Public Corporation

A public corporation, often called a ‘publicly held corporation,’ is listed on the stock exchange. Shares can be freely traded on public markets. Public corporations are subject to extensive securities law regulations regarding disclosure and corporate governance.

Private Corporation

Private corporations are not publicly listed. Their shares are privately held, resulting in less extensive disclosure obligations but also less opportunity for capital raising.

Close Corporation

A close corporation is a special form with a limited number of shareholders and significant restrictions on share trading. It is particularly suitable for family businesses and small companies.

Classification under International Law

Corporation under US Law

The American corporation is regulated at the state level. Formation in the State of Delaware under the ‘Delaware General Corporation Law’ is particularly common. US law distinguishes between various types:

• C Corporation: Subject to normal corporate income tax.
• S Corporation: Taxation is passed through to the shareholders; certain requirements must be met (e.g., limited number of shareholders).

Corporation under British Law

In the United Kingdom, the corporation most broadly corresponds to the ‘company’ (specifically, ‘public limited company – plc’ and ‘private limited company – ltd’). UK Company Law governs formation, organization, and duties.

Comparison with Other Legal Systems

Similar legal forms exist, for example, in Canada (Corporation), Australia (Corporation), and New Zealand (Company). In continental Europe, there are parallels to the Aktiengesellschaft (AG) or Société Anonyme (SA), although differences exist in detail.

Taxation and Accounting

A corporation is an independent tax subject. It is taxed on its income under the corporate income tax. Distributions to shareholders (dividends) may be subject to further taxation (‘double taxation’). Many countries offer specific tax regimes, such as the S Corporation under US law, to allow avoidance of double taxation.

For accounting, international standards such as the International Financial Reporting Standards (IFRS) or country-specific regulations (e.g., US-GAAP) apply to corporations.

Dissolution and Liquidation

The dissolution of a corporation can occur voluntarily by resolution of the shareholders or compulsorily in the event of insolvency. Liquidation measures include the settlement of liabilities, realization of company assets, and distribution of any residual assets to shareholders.

Significance and Areas of Application

Corporations occupy a prominent position in international business due to their flexibility, limited liability, and capacity to raise capital. They are represented in virtually all industries, as well as in non-profit, cooperative, or public sectors.

Summary

The corporation is an independent, international organizational form with full legal personality, strict limitation of liability, clear separation of ownership and management, and well-defined rules on corporate organization and control. Due to these legal characteristics and its various forms, it forms the basis of modern capital companies in many countries and is fundamental to the functioning of economic and capital markets.

Frequently Asked Questions

What legal requirements must be met to form a corporation?

The incorporation of a corporation is subject to various formal and substantive requirements, which must be strictly followed and which vary by jurisdiction. In most jurisdictions—such as the USA, United Kingdom, or Canada—the process generally starts with filing a founding document (usually ‘Articles of Incorporation’ or ‘Certificate of Incorporation’) with the relevant authority. This document contains essential information such as the company name, registered office, business purpose of the corporation, details on share classes, and information about the incorporators. In most cases, it is also necessary to appoint at least one Director and a Registered Agent, who serves as the official recipient for legal documents. Many jurisdictions also require the company to draft its own Bylaws, which set out internal regulations regarding general meetings, decision-making, or the appointment and removal of officers. In some jurisdictions, a minimum capital contribution is required, with the amount varying from country to country. Once the formation documents have been filed and accepted and, if necessary, the incorporation fees have been paid, the corporation obtains legal personality as a juridical person.

What are the duties of directors in a corporation?

Directors of a corporation are subject to extensive statutory duties and standards of care. Among the most important are the fiduciary duty, the duty of care, and the duty of confidentiality regarding sensitive information. The fiduciary duty obligates directors to act in the best interests of the corporation and to avoid conflicts of interest. Decisions must always be made impartially and without self-serving motives. The duty of care requires directors to make decisions based on adequate information and after careful consultation and advice. This also means that directors must participate actively in board meetings and keep themselves informed about the company’s business. In case of a breach of duty, directors can be held liable both civilly (especially for damages) and, in certain circumstances, criminally, with the exact standards of liability depending on the applicable law.

Under what circumstances may a corporation be dissolved?

A corporation can be dissolved voluntarily or involuntarily through liquidation. Voluntary dissolution usually occurs by resolution of the shareholders, adopted at an ordinary or extraordinary general meeting. This typically requires a qualified majority, the threshold of which may be specified in the bylaws or by law. Afterwards, statutory procedures for liquidation must be observed, including the appointment of one or more liquidators, satisfaction of all creditors, and distribution of any remaining company assets to the shareholders. Involuntary liquidation can also be ordered by the courts, for example in the case of insolvency, serious legal violations by the company, or if the company no longer fulfills its business purpose. After liquidation is completed, the corporation is deleted from the commercial register or register of companies, at which point it definitively ceases to exist.

What liability rules apply to shareholders of a corporation?

A particularly characteristic feature of the corporation from a legal perspective is the limitation of liability for shareholders. Shareholders are generally not liable with their private assets for the company’s debts, but only up to the amount of their investment or subscribed and paid-in capital. This principle of ‘limited liability’ distinguishes the corporation from partnerships and effectively protects shareholders against personal liability. However, exceptions do apply in cases where a so-called ‘piercing of the corporate veil’ is ordered by courts for special reasons—such as abuse of the corporate form, commingling of assets, or fraudulent concealment of insolvency. In such cases, personal assets of the shareholders may exceptionally be subject to liability.

How is a corporation taxed from a legal perspective?

In most countries, the corporation is considered a separate tax subject and is therefore subject to corporate income tax on its earnings. The specific tax rates, exemptions, and deductibility of expenses vary depending on national tax law. In addition, retained earnings within the company are subject to special tax provisions. Distributions to shareholders (dividends) are regularly subject to additional taxation at the level of the recipients (so-called economic double taxation). Many countries offer relief measures to avoid or mitigate double taxation, such as dividend privileges or double taxation agreements. Furthermore, depending on the corporation’s structure and international activities, aspects such as withholding taxes and transfer pricing may also become legally relevant.

What disclosure and transparency requirements apply to a corporation?

Corporations are subject to extensive disclosure obligations to ensure transparency and creditor protection. This especially includes the regular filing of annual financial statements, business reports, and director’s reports with the responsible supervisory authority or commercial register. The extent of the information required to be disclosed varies according to company size and stock exchange listing status. Public corporations (public companies) are subject to particularly strict reporting and disclosure requirements under applicable securities laws (e.g., the US Securities Exchange Act). Violations of these disclosure obligations can result in severe penalties, liability of company officers, and—if false information is provided—criminal consequences.

To what extent can the corporation’s bylaws modify its legal foundations?

The bylaws of a corporation form the central regulatory framework for the internal organization and management of the company. Within the limits of the applicable jurisdiction, they can supplement or specify legal requirements, but cannot generally override mandatory statutory provisions. The bylaws typically regulate matters such as convening and conducting meetings, resolutions, powers and responsibilities of directors, rights and duties of shareholders, and the modalities of capital raising. Amendments to the bylaws are only legally permitted by duly qualified majorities of the shareholders and, where applicable, must be reported to the relevant authorities. Certain bylaw amendments (such as mergers, capital increases) often require additional approvals or disclosure obligations.