Ch2. Introduction to Corporate Law — Business Entity Types & Formation

What Is a Business Entity?

Business Entity:
A legal organization formed to carry on a trade, profession,
or other profit-seeking activity.

Core characteristics:
① Legal personhood: separate legal identity from its owners
② Profit orientation: organized for economic gain
③ Collective structure: association of members
   (single-member entities permitted in most states)

Principal US entity types:
General Partnership · Limited Partnership · LLC ·
C-Corporation · S-Corporation · Sole Proprietorship

Comparison of Entity Types

┌────────────────────┬──────────────┬──────────────┬──────────────┐
│ Feature            │ Gen. Partner.│ Ltd. Partner.│ Corporation  │
├────────────────────┼──────────────┼──────────────┼──────────────┤
│ Unlimited liability│ All partners │ ≥ 1 GP       │ None         │
│ Limited liability  │ None         │ ≥ 1 LP       │ All (stockh.)│
│ Min. members       │ 2            │ 2            │ 1            │
│ Shares issued      │ No           │ No           │ Yes          │
│ Board of directors │ No           │ No           │ Yes          │
└────────────────────┴──────────────┴──────────────┴──────────────┘

LLC (Limited Liability Company):
- Members enjoy limited liability
- Flexible management (member-managed or manager-managed)
- Pass-through taxation by default
- No board required

Close Corporation / S-Corp:
- Small, privately held company
- Limited number of shareholders (S-Corp: ≤ 100)
- No publicly traded shares
- Reduced public disclosure obligations

The Corporation

Corporate characteristics:
① Capitalization: divided into shares of stock
② Shareholders: limited liability (capped at investment)
③ Separation of ownership and management
④ Free transferability of shares (unless restricted)
⑤ Disclosure obligations (annual reports, SEC filings for public cos.)

Minimum capital: none required in most states
   (Delaware, for example, requires only a nominal par value)

Shareholder limited liability:
A shareholder is responsible only for the amount invested.
No personal liability for corporate debts.

Piercing the Corporate Veil

Piercing the Corporate Veil:
Treating the corporation as if it does not exist as a separate
entity, thereby holding the owners personally liable.

Grounds for piercing (typical two-prong test):
① Alter ego / unity of interest: the shareholder treats corporate
   and personal assets interchangeably (no separate finances,
   no formalities observed, etc.)
② Fraud / injustice: allowing the shield would sanction fraud
   or promote injustice

Effect:
The court "pierces" the veil and holds the controlling shareholder
personally liable for corporate obligations.

Classic example:
A sole shareholder pays personal bills from corporate accounts,
commingles funds, and fails to hold meetings or keep minutes
→ court may hold that shareholder personally liable for
   corporate debts

Forming a Corporation

Incorporator Formation:
Incorporators subscribe to all initial shares
→ Completed upon filing Articles of Incorporation with the state

Public Offering Formation (for larger companies):
Founders subscribe to a portion + public offering
→ Organizational meeting → state filing

Key steps:
Draft Articles of Incorporation → Issue stock → Pay in capital
→ Elect directors & officers → File with Secretary of State
→ Adopt bylaws

Incorporator:
The person(s) who sign(s) and file(s) the Articles of Incorporation.
Incorporators are typically the initial shareholders.

Key Concept Cards

Shareholder Limited Liability ★★★★★ : Shareholders are liable only up to their investment. No personal liability for corporate debts. Memory hook: shareholders = investment cap only

General Partnership = All Partners Unlimited Liability ★★★★★ : GP — all partners have unlimited liability. LP — mix of GP (unlimited) and LP (limited). Corporation — all shareholders limited. Memory hook: GP = unlimited, LP = mixed, Corp = limited

Piercing the Corporate Veil ★★★★☆ : Alter ego + injustice → court ignores corporate form and reaches controlling shareholder. Prevents misuse of the entity shield. Memory hook: piercing = reach behind the entity

Practice Questions

Q. What is the difference between a general partner and a limited partner in a limited partnership?

A general partner manages the business and bears unlimited personal liability for partnership debts. A limited partner contributes capital but is liable only up to their investment and may not take an active role in management without risking losing their limited-liability status.

Q. Why is the corporation the most common form for large businesses?

Shareholder limited liability + free transferability of shares + ability to raise large amounts of capital from many investors. Because investors risk only their investment, corporations can attract capital at a scale impossible for partnerships or sole proprietorships.