It appears that many are confused about the area in law that we call “corporate law.” What is it that corporate lawyers do anyway? Is there a difference between the terms “business,” “corporation,” and “company”? Why do businesses incorporate?
While there is much to discuss in the area of corporate law, this article will address the most basic questions and define fundamental terms in the area of corporate law.
Let’s begin with some definitions:
What is a Corporation?
The Canadian encyclopedia defines a corporation as follows:
A corporation is an artificial entity created by or under the laws of a state. Corporation law (also referred to as company law) is the body of law that governs the formation, governance and dissolution of corporations.
It is also pertinent to note that the corporate structure is most often chosen for large business operations that carry on business for profit. Business corporations generate most of Canada’s revenue although cities, universities, charitable organizations, and other entities can often be incorporated as well.
Corporate Law or Business Law?
While the terms “corporate law” and its colloquial counterpart “business law” are used interchangeably, the terms are slightly different. Business law refers to the wider concept of commercial law; that is, the law relating to commercial or business-related activities. However, using the term “business law” as a substitute for “corporate law” simply means that we are dealing with a business corporation or enterprise that requires capital raising, company formation, registration, etc.
Corporation Law or Company Law?
A corporation may accurately be called a company; however, a company cannot necessarily be called a corporation, which has distinct characteristics. A company, which is also known as a “firm” or “business” is not necessarily a separate legal entity, the most significant defining characteristic of a corporation. This attribute also confers its owners and shareholders with its most distinctive benefit: limited liability.
Limited Liability is just one of the benefits of incorporating your business. Let’s understand what that means and what the other benefits are.
The Benefits of a Corporation
The primary reasons for choosing to incorporate is to obtain the benefits of limited liability or to take advantage of the different tax regime pertaining to corporations. Corporations are subject to numerous regulations they must follow in order to enjoy the tax and other benefits corporations receive.
Limited liability is one of five attributes that define a corporation. In the event a corporation becomes insolvent, the owner and shareholders are not liable for the debts or other obligations incurred by the corporation. Yes, the shareholders will lose their investment, but they will not be responsible for its debt.
Limited liability arises from another attribute conferred on corporations: its status as a “separate legal entity,” meaning that a corporation operates distinct from its shareholders, directors, and officers. Like a person, a corporation can own property, enter into a contract, sue and be sued, and be convicted of a criminal offense (corporations pay fines in lieu of imprisonment.).
The other attributes of a corporation are “perpetual existence,” “free transferability of an investor’s interest,” and “centralized management.” Perpetual existence refers to a corporation’s continued existence until it is liquidated or dissolved. “Free transferability” refers to the shareholders’ ability to sell shares without the consent of the directors, officers, or other shareholders, unless otherwise restricted in the corporate constitution. This provides an ideal vehicle for investment in that it greatly enhances the liquidity of the shareholder’s investment. Lastly, “centralize management” refers to its delegated management structure, under which a board of directors delegates the corporation’s management to officers and employees.
To round out our picture of this basic primer in corporate law, it might be helpful to have a look at the day-to-day life of a corporate lawyer to get an idea of what practicing in this area is really like.
What Do Corporate Lawyers Do Anyway?
The days of a corporate lawyer are filled with transactions related to corporate law’s several major areas of practice: mergers and acquisitions, real estate, corporate finance, and insolvency and banking. A typical day includes incorporating companies; acting on mergers and acquisitions; restructuring of corporate entities; drafting documents for shareholder agreements; conducting due diligence by researching past company filings and disclosure documents; and drafting documents, such as director’s resolutions, material change reports, articles of association, or securities memorandums.
While seemingly a more “dry” area of law, it can be highly stimulating and challenging: No two corporate transactions are the same. Each deal varies based on the type of industry, the size of the company, or whether it is a single or multi-market business. A client can be an investment bank, a privately held company, a small or medium sized business, a government or regulatory agency, or a multi-national corporation.
Lawyers are not created equally
There are many diverse areas in law that run the gamut from personal injury and civil litigation to family and bankruptcy law. While there are many areas in law (see side bars), there are thousands of lawyers who specialize in the practice of each. The latest statistics from the Law Society of Canada counts 24, 277 lawyers in Ontario alone.
It is obvious that not all lawyers have an aptitude to practice in all areas of law. So which personality types make the best corporate lawyers? The practice of corporate law is ideal for those who have the right temperament and skill set. Practicing corporate law requires strong communication and negotiating skills; a large storehouse of knowledge in business law, as well as current trends in legislative and regulatory developments; analytical skills, and meticulous attention to detail. Corporate lawyers must also deal with people of all stripes who are entering into difficult negotiations, so they must also have interpersonal and people management skills.