Key Takeaways

  • A corporation has a perpetual legal life, existing beyond the involvement or death of its founders or shareholders.
  • Corporate life is supported by continuity of management, limited liability, and transferability of ownership interests.
  • Advantages of corporations include strong liability protection, ability to raise capital, and potential tax benefits, while disadvantages include high costs, complexity, and double taxation risks.
  • Corporate-owned life insurance (COLI) is a tool used by corporations to protect financial interests, fund buy-sell agreements, or provide executive benefits.
  • The legal life of a corporation can end only through dissolution, whether voluntary, administrative, or judicial.
  • Professional corporations and specialized structures (e.g., PCs, P.A.s) are available for licensed professionals and come with unique liability rules.

The legal life of a corporation is perpetual. Corporations are a separate legal entity from the owners or shareholders, and as long as the corporation is in legal status, it is considered active. Legal status includes:

  • Continuity of life.
  • Centralized management.
  • Limited liability.
  • Transfer of interests.

What Is a Corporation?

A corporation is different from a sole proprietorship or partnership because the corporation is a legal entity separate from its owners. This allows the owners and shareholders to avoid personal liability from any debts of legal claims made against the corporation. To maintain the corporation status, the following must occur:

  • Hold annual corporate meetings.
  • Record meeting minutes.
  • Issue stock certificates to shareholders.
  • Elect a board of directors.
  • Ratify and confirm the existing directors status.

A corporation's main advantage, and why it is widely used, is liability protection. The personal assets cannot be used to fulfill the debts and obligations of the corporation. The only caveat to this rule is if it is shown that the corporation has acted improperly. This action is called piercing the corporate veil. Proof of wrongdoing can include:

  • Failing to follow corporate formalities including holding the annual meeting or keeping meeting minutes.
  • Proof exists that the corporation is being used only to protect the shareholder's personal assets.

If proven, when the veil is removed, the shareholders will become personally liable.

Perpetual Life of a Corporation

One of the defining features of a corporation is its perpetual life. Unlike sole proprietorships or partnerships, a corporation’s existence is not tied to the lifespan of its owners or directors. The corporation continues to exist even if shareholders sell their stock, directors resign, or founders pass away. This continuity provides stability for investors, employees, and customers.

However, perpetual existence does not mean a corporation is indestructible. The life of the corporation can end through a formal dissolution process, which may be initiated voluntarily by shareholders, administratively by the state for failing to comply with corporate formalities, or judicially by court order.

Advantages and Disadvantages of a Corporation

Other advantages of using a corporation include:

  • Earnings can be kept in the corporation for use in future investment opportunities or dividends.
  • Corporations are simple to form and clearly laid out by the laws of the state of formation.
  • Tax advantages including the ability to retain or pass the earnings.

Forming a corporation also has disadvantages including:

  • Maintaining legally required formalities to retain corporate status.
  • The administration is complicated must follow federal and state tax procedures which can be expensive.
  • Fees at the initial formation and annual filing fees can be costly.
  • Accounting and tax preparation fees can be high and are necessary to meet corporate laws.
  • Professional tax advice is to necessary to limit double taxation.

Corporate-Owned Life Insurance (COLI)

Another concept tied to corporation life is corporate-owned life insurance (COLI). This is a policy purchased and owned by a corporation, with the company often serving as the beneficiary. Corporations may use COLI to:

  • Protect against the financial loss of a key executive.
  • Fund buy-sell agreements between owners or shareholders.
  • Cover employee benefit liabilities, such as deferred compensation plans.
  • Provide additional capital in the event of a leader’s death.

While COLI can be a valuable tool, it is subject to specific tax and reporting requirements. Some states and federal regulations require written consent from the insured employee and impose restrictions on the deductibility of premiums. Businesses considering COLI should weigh the costs, tax implications, and ethical considerations.

How To Form a Corporation

Compared to a sole partnership or sole proprietorship, forming a corporation is more expensive and complicated based on the requirement to file with the state Secretary of State office or website. A filing is also a requirement to form an LLC. With that said, the formation process includes filing the articles of incorporation with the state Secretary of State, or related agency. It is required in some states that a copy of the certificate is kept with the local recorder office.

Forming the corporation does not have to take place in the state where business will take place. Many corporations from in Nevada or Delaware to take advantage of laws put in place for the benefit of the corporation. If the corporation conducts business in other states, they must file as a foreign corporation in those states. As a foreign corporation, you must: select a registered agent (someone who can receive and act as a representative of the corporation), and pay the initial and annual fees.

Selecting a name for the corporation is an important step. When selecting a name, it must be:

  • Unique in that it is not in used by another business entity.
  • It cannot be confused with or too similar to another business entity or competitor.
  • It must meet the legal requirements dictated by the state of formation.

Registering the name can take place on the phone, online, or through the mail. Check with the state website to confirm the options.

Professional service providers can form as a corporation. Professional services cover doctors, lawyers, accountants, and other services that require a license. Professional corporations can only perform the service they are licensed to perform. An example would be that a law firm may not also offer accounting services.

For professionals, a corporation is ideal because it protects them from liability when malpractice is committed by others in the corporation. This does not protect themselves in the case of their wrongdoing. As a professional corporation, the name is legally required to identify itself accordingly. Examples include P.C, P.A., incorporated, or chartered.

Dissolution and Ending the Corporation Life

Although corporations enjoy perpetual existence, there are situations where the legal life of a corporation comes to an end. Dissolution occurs in three main ways:

  1. Voluntary Dissolution – Shareholders vote to wind down the corporation and liquidate its assets.
  2. Administrative Dissolution – The state revokes corporate status for failure to file annual reports, pay fees, or comply with statutory requirements.
  3. Judicial Dissolution – A court orders dissolution, often in cases of fraud, deadlock, or shareholder disputes.

The dissolution process typically requires filing articles of dissolution with the state, settling debts, distributing remaining assets, and formally notifying stakeholders. Until these steps are completed, the corporation continues to exist legally, even if business operations cease.

Frequently Asked Questions

1. How long does a corporation last?

A corporation has perpetual life, meaning it exists indefinitely unless it is formally dissolved by its owners, the state, or a court.

2. What is corporate-owned life insurance (COLI)?

COLI is a life insurance policy purchased by a corporation, often to cover key executives, fund buy-sell agreements, or provide employee benefits.

3. Can shareholders’ deaths end a corporation’s life?

No. The death of shareholders does not affect the corporation’s legal existence, as ownership interests can be transferred.

4. What are the main ways a corporation can dissolve?

A corporation can dissolve voluntarily by shareholder vote, administratively by state action, or judicially by court order.

5. Why do professionals form professional corporations?

Professional corporations (PCs or P.A.s) allow licensed professionals to limit liability for malpractice committed by other members of the firm while still being accountable for their own actions.

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