Corporate Personhood, Explained

Some people have joked about the idea of corporations being people. It sounds like a ridiculous enough statement, and on its face, it is; a business is not a human being, no matter how generously you stretch the definition of either. However, legally speaking, it’s true that corporations are people (sort of), and if you’re running your own corporation, it can help to understand how corporate personhood works.

The legal fiction of corporate personhood, as it’s formally called, does not state that corporations are equivalent to living human beings. Indeed, that’s why the law often distinguishes between “natural persons” (human beings) and “legal persons” (which includes both human beings and corporations). However, for some purposes, a corporation is considered a person: an entity which is legally distinct from the people who run it, and which can make decisions about its own self-interest via its officers, shareholders and board of directors. It owns its own property, makes its own money, pays its own bills, and makes decisions about how to run itself, just like a person does.

On a day to day level, this is important because it means whenever you make money through an incorporated entity (such as a business or non-profit you’ve incorporated), it’s not actually your money. Instead, that money belongs to the corporation, which is supposed to have its own separate bank accounts and separate books. The only way you’re supposed to make money through a corporation is either by drawing a paycheck, by receiving a dividend, or by selling your stock in the corporation. Likewise, a corporation has its own set of taxes that it needs to pay, independent of all the people who own and run it.

The upside to this becomes apparent if the corporation runs into legal or financial trouble. Just as a corporation has its own profits, so too does it have its own debts and liabilities, which means if your corporation is sued or falls into arrears, it’s the corporation that’s in trouble, not you. And if your corporation fails, you can generally walk away without worrying about any of the debt or legal liability following you, the way it would if you didn’t have the protection of corporate personhood.

However, there is a catch: it’s called the “legal fiction” of corporate personhood for a reason. A corporation will only be treated as a person for legal purposes if the people who run it also treat it like a person. It’s a similar situation to Tinkerbell in Peter Pan: you need to clap your hands if you believe. You need to maintain separate finances and books, hold meetings for shareholders and the board of directors, and do everything else that’s part and parcel of running your corporation. If you don’t and your corporation runs into legal or financial trouble, a court may decide to “pierce the corporate veil” and determine that your corporation is merely a shield for your own personal activities. If that happens, you can be held liable for all your corporation’s debts and liabilities.

If you’re looking to start your own corporation, whether for a business or for a non-profit organization, it is worth your time to speak with an experienced corporate law attorney. The attorneys at Wingate, Kearney & Cullen, LLP have handled many corporate and business law matters on behalf of their clients. For more information or to schedule a consultation, call (718) 852-5900.