The Value of Incorporation

by Jonathan Kuttab

The creation and registration of a juridical body simply allows for bringing into being a fictional virtual legal entity that is separate and distinct from the individuals who created it or who run it. Its “Charter of Incorporation” is its birth certificate and it describes how that new entity is to run its affairs: who will be its shareholders (members); what are the rights, powers and entitlements of each?  How are members to be added or removed, what activities it is allowed to conduct, and how long will it last ( usually in perpetuity) and what would happen to its assets if it is dissolved.

It is important to note that once the entity is registered, it acquires its own “personality” or identity.  It has a separate name  tax number, and is recognized by the courts and the government as a distinct body.  It can sue and be sued, hire employees, rent a premises, open a bank account,  and both acquire possessions, and hire out its services, and transact business with others, including some of its own members.   When the latter happens, the members transact business in their own right, and it is presumed that they have an arms-length dealing with their organization.  The daily functioning of the entity is carried out by employees ( hired or unpaid) who are authorized to act usually by the Board of Directors who are elected according to the provisions of the articles of incorporation or by laws of the entity.

One of the advantages of incorporation, is that there is a limit to the responsibility and liability of the members for actions of their corporation.  Their liability is limited to their participation in the capital of the company, however minimal, and once that is paid off, they have no responsibility whatsoever.

If a group acts collectively without incorporating, however, the law ( and society) has a right to treat their actions as the actions of a group of individuals, who are each personally responsible for the actions, liabilities, and even crimes of the group.  They cannot hide behind the collective, because the collective does not exist in fact or in law, even if everyone related to it as a group.  Any member can also claim that the actions of others within the group are individual actions of the individuals who committed them that do not pertain to him/her.  Often vendors, or organizations will refuse to rent, or contract with a “group” which is not incorporated.  Banks will not open an account, and utilities suppliers and telephone companies will not start accounts for unregistered groups

In the past the act of incorporation was done by a Royal Charter which specified the nature and activities of the chartered entity, and granted it juridical power to act in that limited capacity.  Today, two or three individuals, ( and in certain cases one only) can incorporate into a distinct legal entity, and the range of activities allowed to such an entity can be very broad indeed and can cover most of what a human being can do.

Charitable organizations, or no n-profit entities share all the above qualities except that they are not permitted to distribute profits to their shareholders or their heirs, but must reinvest the excess of their income over expenses, into carry


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