When forming a company, the options are sole proprietor, partnership, and corporation. Most choose incorporation. Why is the corporate form seen to be best? What rights do the stockholders have?
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The primary reason many choose a corporation is that it (along with the LLC form) provides a legal separation of assets and obligations thereby providing a "limitation" to legal liability (the principal exclusions being criminal intent and professional malpractice litigation cases). This separation effectively limits the shareholders liability to their investment in the business leaving other personal assets (home, automobile, investments) untouchable.
The shareholders of a corporation gain their legal rights through the ownership of the business and its operations. To comprehend the workings of this it is necessary to understand the operating structure of a corporation. The shareholders own the corporation. They, in turn, elect the board of directors who set the general tone of the business both in its operations and future planning. The board of directors elect the officers of the corporation who are responsible, to the board of directors, for carrying out the day to day functioning of the mandates set forth by the board. Officers are employees but may also be directors and/or shareholders. The shareholders meet at least annually and can replace the board if they do not approve of the actions/decisions of the board. Thus the operating of the corporation is as follows:
Shareholders elect board
Board elects officers
Officers implement policies.
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