Who Legally Owns a Corporation: Everything You Need to Know
Who legally owns a corporation? The answer is that the laws of the state where the corporation is formed determine who owns a corporation.3 min read
Who legally owns a corporation? The answer is that the laws of the state where the corporation is formed determine who owns a corporation. The ownership of a corporate entity, in all states, revolved around its shares of stock.
About Corporation Ownership
There is more than one way people determine who is the legal owner(s) of a corporation. The late economist, Milton Friedman, believed a corporation's shareholders were the rightful owners. This was based on the fact that shareholders have a stake in the corporation as well as voting rights and other types of rights assigned to owners.
A law professor, Stephen Bainbridge, disagrees that shareholders are the true owners because a corporation is not capable of being owned. His argument signifies a corporation as a separate and distinct entity. This way of thinking is referred to as "corporate personhood."
A shareholder or stockholder is an individual who has ownership of a designated number of shares in a corporation.
In most cases, the shareholders are those who have invested their own money and time into the formation and future growth of the corporation. For example, three friends starting a business with each investing a set amount of money for the capital for the startup operation are likely considered the corporation's shareholders.
It is not necessary for a shareholder to have a monetary investment in the business for there to be partial ownership. This situation could present itself in a family business where a child receives a small percentage of ownership as a shareholder. In the future, when the parents are ready to retire, it will be easier for the child to take over the reins of the corporation as the owner or main shareholder.
Usually, the corporation's shareholders are the initial founders who have invested personal assets into the company's formation. Once formed and the articles are filed, the people of other businesses involved with the ownership of the company are issued shares of stock. The shares are in exchange for the capital contributions such as cash or services.
A corporation's stock may be sold publicly or privately, which means some companies may have a few shareholders while others have thousands. All shares of stock authorized in the corporation's articles of incorporation are not required to be issued. However, the ownership percentage of the shareholders is determined by the number of shares each holds in relation to the shares issued by the corporation.
In some corporations, there may be different classes of stock. This means some shareholders will retain different rights than others within the corporation. The rights retained by most shareholders in a corporation include:
- The right to elect and remove the directors of the corporation.
- The right to sell their shares of stock.
- The right to receive dividends.
- The right to purchase additional stock should it become available during a corporate offering.
- The right to a share of the assets remaining after the corporation has been liquidated.
Shareholders have rights that are similar to ownership, but shareholders do not legally own a corporation nor have the same rights as a true owner. The shareholder's right to appoint and remove directors does not extend to granting managerial rights nor the right to use corporate assets as they see fit.
Forming a Corporation
To form a corporation, the laws of the state where the corporation's articles of incorporation are filed must be followed. A benefit of setting up a business structure as a corporation is the ownership and control of the entity and who that is delegated to.
Many types of people comprise corporations, including executives, employees, shareholders, and directors. Because of the various parties involved with different views and interests, a corporation may be viewed as its own distinct entity.
Corporations have rights similar to people, such as:
- The right to make political contributions.
- The right to enforce contracts.
- The right to buy and sell a property.
When considering becoming a business owner, setting up a corporation will protect your personal assets unlike that of a self-owned business. If a lawsuit is filed against a corporation, the only loss sustained by the shareholders is the initial investment that each paid to the company.
A lawsuit cannot seek to attach any further personal assets of the shareholder that were not allocated to the business.
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