Corporations

In addition to having perpetual life, a corporation is a legal entity or artificial person separate from its members. A corporation has the power to receive, hold, and convey property, enter into contracts, sue and be sued, and otherwise exercise rights and privileges according to the laws under which it was created.

Liability of Directors or Officers of a Corporation

Directors are analogous to trustees; they have a fiduciary responsibility to stockholders and creditors. By common law, directors are liable to creditors and to the corporation for distributing improper dividends if due to willfulness, negligence, bad faith, or fraud.

Directors and officers are not liable for corporate debts unless the director or officer specifically agrees to become liable and the debts are not bound for corporate contracts.

S Corporations

S Corporations were formerly known as Subchapter S corporations. In 1958 some of the tax advantages enjoyed by proprietorships and partnerships were granted to small, newly formed corporations. The life span of an S Corporation is the same as that for other corporations provided it meets certain requirements. It must have been organized in the United States and not be a member of an affiliated group of corporations responsible to a common parent. It must also meet these additional requirements:

• the corporation has no more than 35 stockholders
  
• stockholders must be individuals, estates, or one of the following types of trusts:
  
• a revocable trust, which is one that is set up and owned by the grantor
  
• a voting trust, in which each beneficiary is counted a separate shareholder in computing the maximum number allowed
  
• a testamentary trust that holds the pseudo corporation stock for not more than 60 days
  
• the individuals must be U.S. citizens or resident aliens
  

Every co-owner, tenant by the entirety, tenant in common, and joint tenant is considered a shareholder when counting the total number. If husband and wife are treated as one stockholder because of the form of ownership, the death of either husband or wife or both will not change the number of stockholders, providing the stock continues to be held by their estates in the same proportion as before death. The S Corporation must earn 75 percent or more of its gross income from its normal business function. If a company's passive earnings, such as rent, interest, royalties, dividends, or capital gains, exceed 25 percent for three consecutive years, the S Corporation status will be terminated. In the meantime, such earnings exceeding 25 percent are subject to the corporate income tax. When an S Corporation is created, every stockholder must agree to have the corporation taxed as individuals. When a new shareholder is added, however, this consent is not needed.

Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore.