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Key Takeaways:
- An artificial person is an entity provided with rights and responsibilities by the law, typically applicable to humans.
- Corporations are commonly recognized as artificial persons and have distinct rights and duties.
- The history and significance of treating corporations as artificial persons date back to the 19th century.
- The tax implications for these entities differ, with nuances between C corporations and S corporations.
Artificial Persons: An Introduction
An artificial person, sometimes referred to as a juristic or legal person, represents entities that the law recognizes with certain human-like rights and responsibilities. These entities exist independently and are legally distinguished from their participants or stakeholders. This concept is pivotal in understanding the workings and responsibilities of corporations and firms in today’s business landscape.
Why Think of Corporations as Artificial Persons?
The term ‘incorporate’ originates from the Latin word corpus, which means ‘body’. This etymology suggests the coming together or unification of various elements to form a single body, which, in legal terms, indicates the establishment of a new legal entity. Post incorporation, these entities are allowed to function as a collective, and they assume responsibility for their collective actions, providing legal protection to the individuals involved from personal liability.
The Rights and Responsibilities Matrix
Being identified as an artificial person, a corporation is entitled to certain rights, such as:
- Protection under the law: This ensures that they are treated fairly and without discrimination.
- Ownership of property: Like individuals, corporations can buy, sell, or lease properties.
- Engaging in business contracts: They have the authority to enter into agreements and form contracts.
However, there are also certain rights that these entities cannot exercise, like getting married, casting a vote, or vying for a political position, which remain exclusive to individuals.
On the responsibility spectrum, these entities are accountable for their actions and those of their employees. Being recognized under the law, corporations are expected to function within the frameworks established by various government regulations and statutes.
Legal Repercussions and The 14th Amendment
Given that corporations function as separate legal entities, they can be taken to court. They are held liable for their actions, similar to individuals. If they violate the law or if someone files a lawsuit against them, the court can impose penalties or even ask the entity to dissolve.
Furthermore, corporations enjoy protection under the 14th amendment. This amendment ensures that every person, including artificial ones, have equal protection under the law. This legal recognition provides corporations with the ability to seek legal remedies when wronged.
Historical Context
The Supreme Court acknowledged the concept of viewing corporations as individuals back in 1891 during the Gulf, Colorado & Santa Fe Railway Co. v. Ellis case. The Court asserted that like individual citizens, corporations should enjoy protection under the law, thus prohibiting states from denying them equal protection.
Taxes and Artificial Persons: A Different Game
The taxation dynamics for artificial entities, especially corporations, are unique. Corporations have the option to be taxed either as a C corporation or an S corporation.
C corporations face double taxation, where the corporation incurs taxes, and when profits are shared among shareholders, these individuals are also taxed. On the other hand, S corporations allow taxes, profits, and even losses to be reported solely on the shareholders’ tax returns, thus avoiding double taxation.
However, it’s worth noting that not every corporation can qualify as an S corporation. There are specific criteria, like the type and number of shareholders or stock classes, that determine this status.
In essence, understanding the intricacies of artificial persons aids in comprehending the legal and operational dynamics of corporations and firms. These entities, backed by historical legal precedents, play a pivotal role in today’s global business landscape. Treating them as separate legal entities with specific rights and responsibilities ensures a more structured and accountable business environment.
