Corporate law is the body of rules that governs how business corporations are formed, operated, and dissolved. It sets the legal line between a corporation and the people who own it, allocates authority among shareholders, directors, and officers, and establishes the ground rules for raising capital. Because corporations can outlive their founders, enter contracts, own property, and sue or be sued in their own name, this area of law touches nearly every piece of commercial life in the United States.
What a Corporation Is in the Eyes of the Law
A corporation is a legal person. Once properly formed, it holds rights and obligations separate from the people who own it. It can open bank accounts, sign leases, hire employees, borrow money, and appear in court under its own name. That legal personality is what makes a corporation fundamentally different from a sole proprietorship or informal partnership, where the owner and the business are legally the same.
The practical payoff is limited liability. Shareholders risk only the money they invest. If the corporation takes on debts it cannot repay or loses a lawsuit, creditors go after corporate assets, not the personal savings, homes, or retirement accounts of the owners. That protective barrier is often called the corporate veil, and it is the single biggest reason entrepreneurs choose the corporate form. Keeping the veil intact takes ongoing discipline, covered further below.
How a Corporation Is Formed
Articles of Incorporation
Every corporation begins with a charter document filed with the state, usually called the Articles of Incorporation or, in some jurisdictions, the Certificate of Incorporation. The Model Business Corporation Act, which most states use as a template, requires four pieces of information: the corporation’s name, the number of shares it is authorized to issue, the name and street address of a registered agent who can accept legal documents, and the name and address of each incorporator.
The name must be distinguishable from other names on file with the state and must include a designator such as “Corporation,” “Incorporated,” “Company,” or an abbreviation like “Corp.” or “Inc.” The authorized share count sets the ceiling on how many ownership interests the corporation can distribute. It does not mean all those shares will be issued immediately; founders typically authorize more shares than they plan to sell right away to leave room for later investors. Many organizers describe the business purpose in broad terms so they do not have to amend the charter every time the company enters a new line of work.
Most states let you file articles online through the Secretary of State’s website, and many provide fill-in templates. Government filing fees vary widely by state, so check before you submit.
Employer Identification Number
After the state filing, the next step is a federal Employer Identification Number from the IRS. The EIN functions like a Social Security number for the corporation. You need it to open a business bank account, hire employees, and file federal tax returns. The IRS issues EINs for free through its online application tool, and the process takes only a few minutes. You will need the Social Security number or individual taxpayer identification number of the “responsible party” who controls the entity.1Internal Revenue Service. Get an Employer Identification Number
Choosing a State
You do not have to incorporate where your office sits. Over half of the Fortune 500 are incorporated in Delaware, drawn by its specialized business court (the Court of Chancery), a deep body of case law that makes outcomes more predictable, and a corporate statute written to give companies flexibility in structuring their internal affairs. Smaller companies that operate in a single state usually save money and paperwork by incorporating at home, because incorporating elsewhere means registering as a “foreign corporation” in the home state anyway and paying fees in both places. The choice matters because the state of incorporation decides which statute governs the company’s internal affairs, including director liability, shareholder rights, and merger procedures.
How a Corporation Is Taxed
Every newly formed corporation starts as a C corporation for federal tax purposes. A C corporation pays income tax at the entity level at a flat rate of 21 percent of taxable income.2Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed When the corporation distributes profits to shareholders as dividends, those shareholders pay tax again on their personal returns. This is the “double taxation” that makes C corporation status expensive for small, closely held businesses.
An S corporation election avoids the second layer. An S corporation generally pays no federal income tax at the entity level. Profits and losses pass through to shareholders, who report them on their individual returns. To qualify, the corporation must be a domestic company with no more than 100 shareholders, all of whom must be individuals (or certain trusts and estates) who are U.S. citizens or residents. The corporation can have only one class of stock, though differences in voting rights alone do not create a second class.3Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined
Every shareholder must consent to the election, and the corporation must file IRS Form 2553 no later than two months and 15 days after the beginning of the tax year the election should take effect, or at any time during the preceding tax year.4Office of the Law Revision Counsel. 26 USC 1362 – Election, Revocation, Termination Miss that window and the election will not take effect until the following year unless the IRS grants late-election relief. Companies planning to raise venture capital or go public usually find the S corporation shareholder restrictions too tight and stay with the C corporation form.
Who Runs the Company
Corporate law separates ownership from control through a three-tier structure. Shareholders own the company but do not run it day to day. Their main power is electing (and removing) the board of directors at annual meetings. The board sets strategy, approves major transactions, and oversees the corporation’s direction. Directors then appoint officers, such as a CEO, CFO, or Secretary, to handle daily operations.
Corporate bylaws are the internal rulebook. They typically cover voting procedures at shareholder meetings, how many directors serve on the board, what constitutes a quorum for a valid board vote, how often the board meets, and what authority each officer holds. Getting the bylaws right at the outset prevents disputes later, especially around who has the power to approve contracts, take on debt, or issue additional shares.
Many states allow a small corporation to streamline this structure. The same person can serve as sole shareholder, sole director, and sole officer. The corporation still needs to adopt bylaws, hold or document meetings (or sign written consents in lieu of meetings), and keep records of major decisions. Skipping those steps is one of the fastest ways to lose limited liability.
Fiduciary Duties
Directors and officers owe the corporation two duties, and courts take both seriously. The duty of care requires them to make decisions the way a reasonably careful person would: gather relevant information, consider alternatives, and consult experts when the stakes are high. Approving a major acquisition without reading the financial projections would fall short. The duty of loyalty requires putting the corporation’s interests ahead of personal gain. A director cannot steer a business opportunity to a company she personally owns, vote on a contract with a family member’s firm without disclosing the relationship, or use confidential corporate information for private trades.
When a director has a financial or personal interest in a transaction, the standard practice is to disclose the conflict to the full board, step out during deliberation, and abstain from the vote. Most duty-of-loyalty problems start where that step is skipped.
The Business Judgment Rule
Courts do not second-guess every decision that turns out badly. Under the business judgment rule, a court will uphold a director’s decision as long as it was made in good faith, with reasonable care, and with a genuine belief that the action served the corporation’s best interests.5Investor.gov. The Laws That Govern the Securities Industry The rule protects honest mistakes in judgment. It does not protect self-dealing, fraud, or decisions made with no real investigation behind them. If a court finds a breach of fiduciary duty, the director or officer can be held personally liable for the harm the corporation suffered. Shareholders who believe the board itself caused that harm can bring a derivative lawsuit on the corporation’s behalf, with any recovery going back to the corporation rather than to the shareholder who sued.
Keeping the Corporate Veil Intact
Limited liability is not automatic just because you filed articles of incorporation. Courts can “pierce the corporate veil” and hold shareholders personally liable if the corporation is being used as a personal instrument rather than a genuine separate entity. The factors courts look at most often are commingling of personal and business funds, failure to maintain corporate formalities, undercapitalizing the corporation so it could never realistically pay its own obligations, and using the corporate form to commit fraud.
Commingling is the mistake courts see most. Paying personal expenses from the corporate account, depositing business revenue into a personal checking account, or failing to maintain a separate business bank account all signal that the owner does not actually treat the corporation as a distinct entity.6U.S. Small Business Administration. 5 Ways to Separate Your Personal and Business Finances Once a court concludes the corporation is just an “alter ego” of its owner, the shield disappears and personal assets become fair game for creditors.
The formalities that preserve the veil are not difficult, but they require consistency:
- Keep a dedicated business bank account and never use it for personal spending.
- Document major board and shareholder decisions in writing, including date, attendees, issues discussed, and how votes were cast.
- Approve significant contracts, loans, and officer elections through formal board resolutions kept in the corporate record book.
- Fund the corporation with enough money or assets to cover its reasonably foreseeable obligations.
Even a one-person corporation needs to follow these steps. The smaller the company, the more closely a court will examine whether the corporate form is real or just a label.
When Issuing Stock Triggers Securities Law
Issuing stock, even to friends and family, implicates federal securities law. Any offer or sale of securities must be registered with the Securities and Exchange Commission unless an exemption applies.7Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails Full SEC registration involves detailed disclosures about the company’s business, finances, and management, and it triggers ongoing periodic reporting. Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports that are publicly available through the SEC’s EDGAR database.5Investor.gov. The Laws That Govern the Securities Industry
Most small and mid-sized corporations never go through full registration. They rely instead on exemptions under Regulation D, which allows private placements without the cost of a public offering. Rule 504 allows the sale of up to $10 million in securities within a 12-month period. Rule 506(b) allows an unlimited capital raise but prohibits general advertising and limits sales to no more than 35 non-accredited investors, each of whom must be financially sophisticated enough to evaluate the investment.
Whatever exemption applies, the corporation must file a Form D notice with the SEC within 15 days after the first sale of securities, with no filing fee.8U.S. Securities and Exchange Commission. Exempt Offerings Regulation D does not exempt the corporation from antifraud rules or from state securities laws, so working with a securities attorney before issuing stock is a practical necessity.
Staying in Good Standing With the State
Forming a corporation is not a one-time event. Most states require an annual (or in some states biennial) report with updated information about the company’s officers, directors, registered agent, and principal office address. Filing fees and deadlines vary by state. Some states set a fixed calendar deadline; others tie it to the anniversary of the corporation’s formation.
Filing on time keeps the corporation in “good standing.” A Certificate of Good Standing is typically required to open business bank accounts, secure loans, register the corporation to do business in additional states, and bid on government contracts. Fall behind on filings and the state will not issue that certificate and may refuse to process other documents for the corporation.
Continued noncompliance leads to administrative dissolution, where the state revokes the corporation’s legal existence without any court proceeding. An administratively dissolved corporation loses its liability protections and its ability to enforce contracts or appear in court. That gap in legal status can expose owners to personal liability for business obligations that arise during the dissolution period.
Most states allow reinstatement within a limited window, often between two and five years. The process involves identifying exactly why the state dissolved the corporation (missed reports, unpaid taxes, lapsed registered agent), correcting every outstanding issue, filing a reinstatement application, and paying all accumulated fees, penalties, and back taxes. Reinstatement restores the original corporation with its history and legal relationships intact, which is far preferable to forming a new entity, because contracts, licenses, and permits tied to the dissolved entity would not carry over to a new one. If the original name has been claimed by another business during the dissolution period, the reinstating corporation may need to adopt a new name. Once the state’s deadline passes, the option disappears entirely.
Beneficial Ownership Reporting
The Corporate Transparency Act, codified at 31 U.S.C. ยง 5336, created a federal requirement for corporations and LLCs to report information about their beneficial owners to the Financial Crimes Enforcement Network. A beneficial owner is any individual who exercises substantial control over the entity or who owns or controls at least 25 percent of its ownership interests.9Office of the Law Revision Counsel. 31 USC 5336 – Beneficial Ownership Information Reporting Requirements The statute carries civil penalties of up to $500 per day for reporting violations and potential criminal penalties for willful noncompliance.
As of March 2025, FinCEN issued an interim final rule formally exempting all entities created in the United States and their beneficial owners from these reporting requirements. U.S. citizens and domestic reporting companies currently face no enforcement of beneficial ownership penalties or fines.10FinCEN.gov. Beneficial Ownership Information Reporting This area of law remains in flux. Foreign companies registered to do business in the United States may still have reporting obligations, and the exemption for domestic companies could change through future rulemaking or legislation. Checking FinCEN’s current guidance before assuming you have no filing obligation is the safest approach.