Business Law 101 or: Why a Corporation is a Person

There has been a lot of outcry in the social media lately about whether a corporation is or isn’t a person. It seems to me that someone has taken something out of context and used it to lash people who do not know the law into a frenzy. So here’s the scoop, folks. And why should you believe what I say? Because I am a business law attorney. This is what I do, and have done for more than 10 years.

OK, so. Let’s talk about forms of business. When a natural person starts a business, it’s usually a sole proprietorship, which simply means a business with one individual owner. Under the law, there is no difference between the business owner’s personal life and their business life. The owner’s business assets can be seized to pay the owner’s personal debts, and more importantly, the owner’s personal assets can be seized to pay the business’s debts.

So how does an individual protect his personal assets (i.e., his house, his car, his children’s toys, and the cash he uses to feed his children) from business liabilities? He (or she) forms a corporation. The corporation is what we lawyer-types call a legal fiction – it is an entity separate from its owner. It pays its own taxes, nearly always at a higher marginal rate than the owner’s personal rate. It buys and sells property in its own name. It can sue and be sued in its own name. Why? Because the legal definition of “person” includes corporations.  If a corporation was not a “person” under the law, there could be no way to protect the business owner’s personal assets from something horrible that happened in his business.

Let’s take a common occurrence as an illustration. A decides that she has a product that the world desperately needs. Her market research shows a need, so she starts making and marketing the product. A million units later, the manufacturing process hiccups and a single unit explodes, injuring Customer’s child. Customer sues A for damages done to the child.

If A is a sole proprietor, depending on the state where she lives, she could lose EVERYTHING. She could lose her house, her car, her business (remember, this is how she supports her family). Her family could be homeless, and now her children don’t have a place to live.

If, however, A formed a corporation, Customer would sue the corporation. A’s personal property would be protected and her children would be OK. The corporation may be out of business, but A and her family are still on her feet.

Do you begin to see why it is important that a corporation be a “person” under the law? It all has to do with protecting the owner.

Besides all that, who is a corporation, really? It’s people. The shareholders are people. The directors and officers are people. Corporations aren’t faceless. They are operated by people. Those people are generally decent, just like you. Sure, there are a few bad apples. There are in ANY group – of people.

So don’t buy in to the falsehood that corporations shouldn’t be people under the law. If we did away with that very basic point of American law, many more individuals would be bankrupt and out on the streets. Corporations are the backbone of American business – I’m not talking about megacorporations; I’m talking about the small Mom & Pop corporations that are formed every day. Be aware. Be informed. And for all our sakes, don’t just fall into lockstep with any political party’s agenda.