What Does It Mean That Corporations Have 'Perpetual Existence'?
Corporations are popular for business owners who want a business structure that lives on, even after the owners change. A corporation is "an artificial creation of the law existing as a voluntary chartered association of individuals that has most of the rights and duties of natural persons but with perpetual existence and limited liability."
In other words, a corporation exists as a separate legal structure, almost like a person under the law. Unlike a sole proprietorship or a general partnership, a corporation is a separate legal entity. This means it can own property, earn money, and be responsible for its actions, distinct from those who own it.
But "perpetual existence" in this context is a relative term. The corporation may go out of business, get acquired by another entity, or otherwise stop existing at some point. The term states that a corporation exists as its own entity, regardless of what happens to the individuals involved in the business. A discussion of the meaning of the "perpetual existence" of corporations follows.
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Corporate Formation: A Beginning, With or Without an End
Entrepreneurs first file articles of incorporation with their state's secretary of state. This document is like the corporation's birth certificate. It includes important details like the business name, business purpose, and types of stock it will issue. Once done, the business corporation comes to life. It's different from a sole proprietorship or partnership, where the business and the owner are the same for tax purposes and legal matters.
When organizers incorporate a business, they can decide to give it an end date. That means when the corporation's mission is complete, it automatically ends. Or, the organizers could choose not to specify an end date. When this happens, the corporation exists until its owners, the shareholders, decide to end it. After all, shareholders own the corporation. For this reason, corporations have perpetual or ever-lasting existence.
Suppose the entire executive team and the rank-and-file employees of a company quit their jobs. The business entity would live on, and new employees would step in to take their places. Corporations can keep buying, selling, hiring, and growing, even as their managers change. This perpetual existence makes corporations a stable form of business organization.
Reasons for Perpetual Existence of Companies
Why do corporations last forever? The main reason is their structure. Corporations have a board of directors for decision-making and stockholders who own shares of stock. This setup lets the corporation continue even if owners or managers change. It's a big difference from a sole proprietorship, general, or limited partnership, where changes in ownership can mean the end of the business.
Having a perpetual existence has many benefits for a corporation. To survive, many corporations need investors to fund the corporation's endeavors. If a corporation has a perpetual existence, the corporation will continue even if the shareholders, directors, and officers come and go. This means the corporation is a safer, more stable place for investors. It is a more attractive option and raises the chances that the investors will see a return on their money.
Perpetual existence allows the corporation's directors to create a long-term plan for profit growth. This is because they can be sure the corporation will still be there long into the future. This satisfies shareholders because they can be sure they will have long-term gains. It also helps the corporation's customers because the corporation has the chance to innovate on new products. They can respond to customer feedback and build on their expertise.
Finally, perpetual existence benefits the corporation because there is no need to re-file all the documents that started the organization. Instead, it can carry information from year to year, so the company doesn't waste valuable time and effort duplicating work. See FindLaw's Corporations section for more articles and resources.
Tax Implications of Corporate Perpetual Existence
One aspect of a corporation's perpetual existence is how it deals with taxes, especially double taxation. This happens when the corporation pays income tax on its earnings at corporate tax rates. Then, it distributes these earnings as dividends to shareholders. Shareholders get taxed again on their personal income tax returns. This double hit can be a crucial factor for business owners to consider when choosing the corporate form of organization.
State law and federal regulations govern the tax rates and tax treatment for corporations, including those enforced by the Internal Revenue Service (IRS). These laws define how corporations should file their tax returns and pay their taxes. The perpetual existence of corporations means they are subject to these tax laws as long as they exist. This makes understanding and complying a continuous responsibility for corporate management.
Understanding and navigating the tax complexities of a corporation's perpetual existence can be overwhelming. It's often wise to seek professional legal help. Lawyers familiar with corporate tax law can give valuable guidance and support. They can help ensure compliance with the IRS and state laws. They can also help optimize tax advantages while mitigating liabilities. This professional help is a crucial asset.
Downsides to Perpetual Existence
The perpetual existence of corporations offers stability and continuity. But it also presents distinct challenges. This longevity means corporations are subject to evolving legal and regulatory environments. This requires constant adaptation and compliance. Such sustained scrutiny can burden the corporation with a heavy administrative and financial burden.
The enduring nature of a corporation can lead to complexities. These complexities can arise in governance and decision-making. This can be true as successive generations of management and stockholders have differing visions and strategies. These factors can sometimes hinder innovation. It can also lack responsiveness in a fast-changing business landscape.
Get a Handle on Your Corporation's Legal Matters
Corporations have special rules to follow. They must create bylaws like a rulebook for how the corporation will run. Also, they must keep business and personal assets separate to protect personal liability. This means if the corporation gets into trouble, the owners' personal assets (like homes or cars) are usually safe. Organizing these aspects can be overwhelming. A lawyer can help.
When you start a corporation without an end date, you want to build it for perpetuity. A corporation in perpetual existence also has more legal exposure with every passing year. Lawyers can help guide you through this process. They can help build a strong foundation for your business's future.
Contact a local business attorney today to ensure you have all your bases covered.
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