With the Dutch India Trading Company having been chartered in 1602, corporations have been around for at least four centuries. By that standard, limited liability companies (LLCs) are in their infancy, with most states in the U.S. having adopted their first LLC statutes after 1988. Although more and more new businesses, especially small businesses and wholly-owned subsidiaries, are organized as LLCs, corporations are still an important and frequent form of business organization.
The most important attribute of a corporation is that it is a distinct entity, not an extension of its owner (like a sole proprietorship) or its owners (like a partnership). Whether the corporation has one shareholder or millions of shareholders, it is a distinct entity. The second most important attribute of a corporation (and it is second only because it could not exist if the corporation were not an entity separate from its shareholders) is that it is a limited liability entity. That means that the shareholders are not personally responsible for the obligations or liabilities of the corporation, at least not ordinarily. (More on that “ordinarily” part in a moment.) Without the attribute of limited liability, which is sometimes called a liability shield or a corporate veil, publicly traded companies would not exist, and the world’s economy would be vastly different. In fact, it’s probably not an exaggeration to say that civilization would be vastly different without limited liability entities.
As mentioned above, the shareholders of a corporation are not ordinarily responsible for the obligations or liabilities of a company. The word “ordinarily” is an important qualifier, particularly for closely held companies. In some circumstances, when the shareholders have disregarded or abused the corporate form, courts will “pierce the corporate veil” to hold the shareholders personally liable for the obligations of the company. Avoiding that result requires owners of businesses, particularly small businesses, to organize and operate their businesses very carefully.
That’s one of the places where we come in. We assist business owners in setting up the formalities of their corporations in ways that are not only compatible with their business models and processes, but also to avoid potential pitfalls that can lead to veil piercing.
Another place we come in is in helping our clients avoid the types of shareholder disputes that sometimes cripple small businesses. We believe it is important for corporations to have appropriate mechanisms to deal with shareholder disputes, for example through the use of reasonable buy/sell agreements that allow a disgruntled shareholder to leave, or for majority shareholders to remove an uncooperative shareholder, before the business suffers irreparable harm. Then, in those situations in which disputes over corporate control simply cannot be avoided, we represent clients in resolving them, including the use of litigation when necessary.