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Legal System Allows for Business Entities

Cite this article as: Jason Mance Gordon, "Legal System Allows for Business Entities," in The Business Professor, updated January 1, 2015, last accessed April 9, 2020, https://thebusinessprofessor.com/knowledge-base/legal-system-allows-for-business-entities/.
Video ThumbnailWhy does the law forming businesses? The law recognizes business entities.

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Business entities exist pursuant to state laws recognizing their existence. They are efficient mechanisms through which to carry on business. They allow for greater economic productivity and this provides an overall benefit to society. The business entity is generally considered to be a separate being from its owners or employees. The concept is commonly known as “corporate personhood”. Businesses have rights similar to those of individuals that cannot be infringed. Likewise, businesses cannot infringe upon the rights of others without facing criminal or civil liability. A business acts through its agents (owners, directors, employees, etc.) and can enforce its rights or be found liable or guilty in civil or criminal proceedings. Because of the unique nature of business entities, the government undertakes considerable efforts to prevent the use of business entities to harm individuals. Much of the material covered in this text focuses on the laws and regulations that the government uses to control the activity of businesses and the individuals associated with those businesses.

Discussion: What rights do businesses have that are similar to those of humans? What are some of the laws that just apply to businesses? How can business entities cause harm to the economy? What role did businesses have in the financial collapse of 2008? What role did individuals have in the collapse?

Discussion Input
  • In business law, corporations or businesses have the same rights as people, and their entities are considered to be separate from those of the owners. It means that businesses can enter into contracts with individuals and other businesses on their own. Corporations are explicitly protected by the 1st, 5th, and 14th amendments. Just as humans, corporations have rights to free speech. The 5th amendment protects businesses from nationalizing of their property by the government. While some rights such as those of owning property and free speech cut apply to both businesses and humans, some laws only apply to businesses. Laws such as employment laws are meant to regulate businesses. For long, economies have continued to rely on tax from businesses and their employees for sustenance. Businesses in real estate and banks played a huge part in the 2008 financial crisis, as well as individuals, who would take loans for 100% of their new homes’ value. Whenever businesses and banks allow excessive credit to individuals, there is always the danger of an economic crisis.

Academic Research

Schipani, Cindy A. and Milliken, Frances J. and Dworkin, Terry Morehead, The Impact of Employment Law and Practices on Business and Society: The Significance of Worker Voice (October 2017). Forthcoming, Pennsylvania Journal of Business Law; Ross School of Business Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=2941557.

Stevans, Lonnie K., The Effect of Endogenous Right-to-Work Laws on Business and Economic Conditions in the United States: A Multivariate Approach (November 6, 2007). Review of Law and Economics, Vol. 5, No. 1, pp. 595-614, 2009. Available at SSRN: https://ssrn.com/abstract=1027987

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