Perpetual Existence for Corporations

By Michael Kupfer Monday, October 26, 2020

perpetual existence for corporationsCorporations are said to have “perpetual existence,” a term that might be a bit confusing at first glance. After all, corporations do go out of business or are otherwise dissolved, and at that point they no longer exist in the eyes of the law.

What this term is meant to convey is that a corporation typically “lives” separately from its founder(s), shareholders, and employees. In other words, regardless of individuals involved in the business quitting, retiring, or even passing away, the business entity will still exist. Shares of stock in a corporation can typically be passed on to a person’s heirs or beneficiaries defined in a will.

Benefits of Perpetual Existence

The primary benefit of perpetual existence for a corporation is that shareholders and investors know that the company will not simply disappear due to unforeseen circumstances. This makes them more comfortable investing their money, which the corporation often relies upon to spur its growth in the first place.

Related: Why Investors Prefer Delaware Corporations

Another benefit, depending on your point of view, is that, when coupled with a corporate board’s fiduciary duty to act in the best interest of its shareholders, the corporation is obliged to operate with a long-term strategy for growth. It’s nearly impossible for a business to succeed over a sustained period without a sound long-term strategy, so prioritizing that focus is generally in the interest of the shareholders.

In an article written by Andrew A. Schwartz at the University of Colorado Law School, the author states:

“…because they must plan for a perpetual future, corporations should invest like immortal entities, namely with a long time horizon and low discount rate. This method of ‘immortal investing’ offers a number of fundamental advantages to the corporation, and is also in the public interest, as immortal investors can be expected to highly value the future and act as stewards for natural resources and other assets.” [1]

Risks of Perpetual Existence

From a societal perspective, once of the benefits referenced above can also be viewed as a risk. Because the corporation has no defined end and must act in its shareholders’ best interest, the interest of everyone else – its customers, employees, and society at large – can be viewed as being of secondary importance.

A somewhat less significant concern of perpetual existence is that of the founder(s) and leadership of the company. Even though these people may be the driving forces that create and shape the entire company’s mission and positioning, the company’s legacy will ultimately be separate from their own as the corporation eventually moves into the control of others.

Exceptions to Perpetual Existence

Even though perpetual existence is generally a default trait of new corporations, it is not always the case.

First, it’s worth noting that sole proprietorships – businesses which do not have a formal entity surrounding them – typically cease to exist if the proprietor passes away. This is one of several potential disadvantages of a sole proprietorship.

Corporations can also stipulate terms in their Certificate of Incorporation (aka corporate charter) about when the entity will cease operations. For example, the corporation may be created to coordinate a specific event planned for five years later, after which it is no longer needed.

In some cases, corporations may use stipulations in their Certificate of Incorporation or bylaws to specify other ways of limiting the life of the company, such as an expiration/liquidation date on the equity held by some or all shareholders.

How Does a Corporation Close?

So, if a corporation has perpetual existence, what happens if the shareholders decide they want to close the company?

Fortunately, there is a very common mechanism for this, known as dissolution. The corporation, in accordance with its bylaws, can adopt a resolution to dissolve, which must then be voted upon by the shareholders. Once passed, the corporation can file the appropriate paperwork (in Delaware, this is the Certificate of Dissolution) and formally terminate the corporation. This process can sometimes be complicated as the company works to reconcile outstanding debts, while disbursing funds to its exiting shareholders.

Read more about closing a Delaware company.


References:

[1] https://scholar.law.colorado.edu/cgi/viewcontent.cgi?article=1443&context=articles

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