The coveted privilege of conducting business in the corporate form is not an unconditional grant.' As consideration for granting the corporate privilege of doing business with limited liability, the law requires that the shareholders "put at the risk of the business some stake which shall appear reasonably adequate for its prospective needs." This "stake," characterized as equity capital, represents that portion of the shareholders' capital investment which is required by law as the basis of financial responsibility for the protection of corporate creditors. This special fund is substituted for the personal liability which the participants would otherwise have for the debts of an unincorporated business. Equity capital is placed unconditionally at the risk of the business. The shareholders, as the owners of the corporation, are required to be the risk takers as well as the profit sharers. They cannot shift this burden of business risk to the corporate creditors by placing restrictions upon the investment of equity capital which would allow the withdrawal of this special fund and the defeat of the creditors' claims. This does not mean, however,that the participants in a corporate enterprise are limited to the investment of equity capital as the sole means of capitalization. The participants may advance assets to the corporation in the form of loans or through lease devices. Moreover, the corporation may borrow assets from outsiders." Such capital contributions are characterized as debt capital.' Debt capital, as distinguished from equity capital, is not placed unconditionally at the risk of the business. On the contrary, debt capital, whether advanced by the shareholders or outsiders, is normally transferred to the corporation only upon definite terms and conditions.'
Thomas H. Rainey Jr.,
Non-Tax Aspects of Thin Incorporation,
13 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol13/iss3/11