Friday, June 30, 2023

Basic Corporate Filings and Principles

A corporation is an artificial entity with legal rights and obligations under state law. In this blog post, we will discuss some basic information about corporate filing duties and legal principles applicable to a corporation.

State Filings and Annual Fee

A corporation is required to file an annual report and pay an annual fee or franchise tax to the state in which it is incorporated. The annual report typically asks for information such as the principal executive offices, number of authorized shares of stock, names and addresses of directors and senior officers, and the name and address of the registered agent. Some states allow for online filing and payment of the annual fee, while others send paper invoices and annual reports.

Failure to pay the annual fee or file the annual report can result in the termination of the corporation's charter and legal existence. However, the corporation can reinstate its charter by paying a penalty fee plus any past due annual fees within a specified period. Having a corporate secretary to keep track of state filing obligations can prevent the termination of the charter.

Corporation as a Liable Party

Corporations are treated as "persons" for legal purposes, but their liability arises from the actions of their officers, employees, and agents. Courts have traditionally held corporations liable for torts committed by their agents within the scope of their employment. The US Supreme Court has extended this concept to criminal acts, holding that a corporation can be held criminally liable for acts committed by its agents that were motivated to benefit the company.

Presumption that Shareholders and Management are not Liable for Debts: There is a general presumption that the debts of a corporation are not the liability of its shareholders or management. This is referred to as the "corporate veil" of liability protection, which can be pierced in certain circumstances such as ultra vires acts, failure to properly capitalize the corporation, fraud, or failure to maintain corporate existence under state law.

Business Judgment Rule

The business judgment rule is a principle originating from case law that presumes that directors of a corporation acted in good faith and in the best interests of the company when making business decisions. The rule provides a presumption of immunity from personal liability for management members, unless there is evidence of gross negligence, dereliction of duty, fraud, self-dealing, or violation of the duty of care.

Fiduciary Duty of Care

The Fiduciary Duty of Care is a duty that applies to corporate decision makers and those decision makers face potential personal liability for violation of this duty. The duty of care is defined as the exercise of the degree of skill, diligence, and care that a reasonably prudent person would exercise in similar circumstances. Some courts apply a tougher standard of care, referred to as the "conduct of his own affairs."

To ensure compliance with the duty of care, directors and officers need to ensure that the decision-making process was one that adhered to the duty of care. This requires documenting the process, including minutes of board meetings, reports by management, and possibly forming a special committee of independent directors to review proposed corporate actions. In some cases, companies may seek shareholder approval, even if not required by law, to limit liability.

Duty of Loyalty

The Duty of Loyalty is another important principle in the realm of corporate governance. This duty requires directors and officers to act in the best interests of the company and its shareholders, and prohibits acts of self-dealing or other acts of malfeasance. Duty of Loyalty issues usually arise in transactions between the corporation and its directors or officers, between a corporation and a business entity in which directors or officers have a financial interest, and transactions between corporations with common directors or officers.


What is a corporation? A corporation is a legal entity that is separate from its owners, with the right to own assets, enter into contracts, sue or be sued. It can be owned by shareholders and managed by directors and officers.

What are corporate filings? Corporate writings are legal documents and records required to be filed and kept for a corporation, such as articles of incorporation, bylaws, board minutes, and annual reports. These writings provide evidence of the corporation's organization and governance structure.

What is the purpose of corporate filings? The purpose of corporate writings is to provide a formal record of the corporation's existence, structure, and decision-making processes, and to demonstrate compliance with the law and regulations. They are also used to prove the legitimacy of the corporation's actions to the public and stakeholders.

What is the fiduciary duty of care? The fiduciary duty of care is a legal obligation of directors and officers to act with the level of care, skill, and diligence that a reasonably prudent person would exercise in similar circumstances. This requires informed decision-making and not rubber-stamping decisions made by others.

What is the duty of loyalty? The duty of loyalty is a legal obligation of directors and officers to act in the best interests of the corporation and its shareholders, and not to engage in self-dealing or other acts of malfeasance that harm the corporation and its shareholders.

What are some common duty of loyalty issues? Common duty of loyalty issues arise in transactions between a corporation and its directors or officers, between a corporation and a business entity in which directors or officers have a significant financial interest, and in transactions between related corporations with common or interlocking directors or officers.

What is the penalty for violating the duty of loyalty? Breaches of the duty of loyalty can result in personal liability for directors and officers and can lead to shareholder lawsuits. Such breaches are not typically covered by directors and officers insurance and can result in significant damages. The court also tends to harshly punish violators of the duty of loyalty.