“Corporations are people.” You’ve probably heard that said before, but what does that actually mean? It’s a reference to the concept of corporate personhood, the idea that corporations are granted some of the same rights that human beings have under the law and can be treated as a single unit rather than multiple individual owners for the purpose of legal action involving the business.
Calling corporations “people” might seem silly, but corporate personhood is a genuine legal concept that has been around much longer than most people think. Keep reading to learn more about corporate personhood and how it applies to your business.
Defining Corporate Personhood
Corporate personhood is a legal fiction (a false concept that is considered true for the sake of making a law easier to apply in certain circumstances) granting corporations the status of legal entities separate from their owners and entitling them to at least some of the same protections under the law as individual human beings receive.
Corporations are obviously not human beings—they are companies that are owned by a group of shareholders. But a corporation needs certain basic constitutional protections in order to function properly, and applying the law individually to potentially thousands of shareholders in a legal action against a corporation is wildly impractical. As a result, corporations get legally treated as a distinct entity (essentially, a legal person).
How Personhood Affects Your Corporation
Without personhood, a corporation could not functionally operate. At a minimum, corporations need to be able to enter into contracts and may also need to take on debts, buy property, and sue (or be able to be sued). All those actions are legal due process rights of human beings under the Fifth and Fourteenth Amendments but would be useless for corporations without the same protection of due process. No contract, purchase or legal action involving a corporation would be considered valid unless every shareholder was individually involved. Corporate personhood and the rights granted by it allows corporations to instead legally operate as a single entity.
In addition, corporate personhood grants certain other constitutional protections, generally those from the First and Fourth Amendments. Without those protections, a media corporation could be censored with no regard for freedom of speech, corporations could not form organizations for their benefit under freedom of assembly, and the government could conduct searches on a corporation without a warrant or probable cause.
Can a business lose its corporate personhood?
Yes. Corporate personhood depends on the business remaining a separate entity from its owners. If a corporation fails to maintain separation between its owners’ personal finances and interests and those of the business, a court could rule that the company is not truly a separate entity under the alter ego doctrine, and the business owners could be held personally responsible for damages against the business.
For example, say you are a shareholder of a corporation and use company funds to pay for a personal expense. Later on, if your corporation is sued, that suit could potentially be brought against you because corporate funds were put to personal use—which can be used as evidence that there’s not true legal separation between the business and its owners.
In this case, your company would no longer be considered a distinct entity from you—and worse, your personal assets could now be at risk of seizure if needed to pay damages in the suit. To maintain your company’s separation as a legal person from yourself and protect your assets, it’s best to keep personal funds and corporate funds well apart from each other. This means that, at the least, you’ll need a separate business bank account that is only used for company funds and expenditures.
Do LLCs have corporate personhood?
Yes, although they don’t have exactly the same rights as “corporate persons” that corporations do. For example, LLCs taxed as partnerships have different rights and limitations around donating money to political campaigns than corporations. However, like corporations, LLCs can own property, enter into contracts, take on debts, sue and be sued, and be protected by constitutional rights. And like corporations, LLCs are required to keep personal and business finances separate to maintain liability protection, so that if an LLC is served with a lawsuit or goes into debt, the LLC owners (members) are not at risk of having their personal assets seized.
Need a hand forming a corporation or LLC? Sign up for a free account with Northwest and get access to every form you’ll need to register and maintain your business in any state. Rather let someone else handle it? Hire us to incorporate your business for you.