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What Makes a Corporation Legal?

In order for a corporation to be recognized as a limited liability company, it must register with a state office. Professor Sean Griffith explains why this filing is important for the business, their investors, and partners. However, a state does not “create” corporations. Entrepreneurs and investors create, operate, and control corporations within the basic framework of corporate laws. https://youtube.com/watch?v=h3FhxxqVvmA


Well, I think it's important to remember that corporations are limited liability entities. And so in order to get recognition as a limited liability entity, you have to file a piece of paper with the secretary of state, some place. This is true for corporations. It's true for LLCs. It's true for limited partnerships and limited liability partnerships. You have to be organized somewhere and you have to file a piece of paper that says you are a limited liability entity. Those filings serve notice purposes so that the counterparties in contract understand that they're dealing with an entity that's a limited liability entity. Why does that matter to them? It might matter to them because they might want to not deal with a limited liability entity or more likely they'll want to do things in the contract to take account for the fact that they only have a limited recourse to pursue if there is a breach. But it's important not to overemphasize the importance of filing in a state. States don't create corporations. People create corporations. Corporations are the result of spontaneous order. People come together to form a business, to do something and they need to organize it someplace. So what the state does is give them a place to file a piece of paper. And another way to think about this is it's not just a piece of paper, but what you're doing when you file the piece of paper is accepting the default rule of law that that state provides in its corporate law. But corporate law is very flexible. Corporations and their bylaws and their charter documents can alter those rules with their investors almost entirely. There are very few corporate law rules that are not alterable. And so the ability to alter the corporate structure is extremely important. That's why it's important to think of the corporation not so much as a thing that exists under state law, as a thing that's created by the founding investors to do business. What the state law provides is an organizational form that is tailored to fit the business of the founding investors.

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