Corporation

Categories: Business law | Corporations law | Legal entities | Types of companies

A corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a natural person. Civil law systems may refer to corporations as "moral persons;" they may also go by the name "AS" (anonymous society) or something similar, depending on language (see below).

In colloquial usage, "corporation" usually refers to a commercial entity set up in accordance with a governmental framework. Churches (mainly in US, but not so much in other countries, where Churches have a different status), interest groups (both can form as not-for-profit corporations or can exist as voluntary associations), cities and townships (often chartered as public corporations), among others, may also have historically lengthy corporate identities.

Legal status

The law typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person); United States law recognises this as corporate personhood. Under such a doctrine (obviously a legal fiction), a corporation enjoys many of the rights and obligations of individual citizens, such as the ability to own property, sign binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a corporation cannot vote.)

In common law countries, the classic statement of this principle is found in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915], where Lord Haldane said:

"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation."

The most salient features of incorporation include:

Limited Liability. Unlike in a partnership, stockholders of a corporation hold no liability for the corporation's debts and obligations: see leading case in common law, Salomon v. Salomon & Co.. As a result their "limited" potential losses cannot exceed the amount which they paid for the stock. Not only does this allow corporations to engage in risky enterprises, but limited liability also forms the basis for trading in corporate stock. Without the limitation on the amount that an investor can lose, the time and effort required to determine whether the stock could wipe the investor out would render the stock market very illiquid (as one can observe in the very illiquid market for partnership interests). A lender can, however, require a personal guarantee on a loan to a corporation, thus introducing personal liability.
Perpetual Lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, officers or directors. This allows for stability of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution. This feature also had great importance in the medieval period, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain.
Profit Maximization. In Anglo-American jurisdictions, business corporations are generally required to serve the best interests of the shareholders, a rule that courts have generally interpreted to mean the maximization of share value, and thus profits. Corporate directors are prohibited by corporate law from sacrificing profits to serve some other interest, such as environmental protection, or the improvement of the welfare of the community. For example, when Henry Ford reduced car prices in order to increase the number of people who could afford to buy his cars, his brother-in-law, Mr. Dodge, a shareholder, sued him for having harmed profitability: Dodge v. Ford Motor Co., 170 N.W 688 (Mich.S.C. 1919). Mr. Dodge succeeded and went on to form his own car company with the proceeds of the suit.

Ownership and control

Humans and other legal entities (such as trusts and other corporations) can hold shares. When no stockholders exist, a corporation may exist as a "non-stock corporation", a "membership corporation", or similar — this second type of corporation counts as a not-for-profit corporation. In either category, the corporation comprises a collective of individuals with a distinct legal status and with special privileges not vouchsafed to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals.

Typically, a board of directors governs a corporation on the stockholders' behalf. The board has a fiduciary duty to look after the interests of the corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers are chosen by the board to manage the affairs of the corporation.

Corporations can also be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a control interest analogous to that of a shareholder, including one or more seats on the board of directors. Creditors are not said to "own" the corporation as shareholders do, but can outweigh the shareholders in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit.

Shareholders in a corporation are said to have a "residual interest." Should the corporation end its existence, the shareholders are the last to receive its assets, following creditors and others with interests in the corporation. This can make investment in a corporation risky; however, the risk is outweighed by the corporation's limited liability, which ensures that the shareholder will only be liable for the amount they invested.

Formation

Historically, corporations were created by special charter of state governments. Today, corporations are usually registered with a state, and become regulated by the laws enacted by that state. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must designate the principal address of the corporation (where to contact it in the event of legal process), and often an agent or other legal representative of the corporation.

Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation's directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.

The law of the state in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.

Naming

Corporations generally have a distinct name. Historically, corporations were named after their membership: for instance, "The President and Fellows of Harvard College." Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers (e.g., "Ontario 123-4567 Limited").

In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity: "Inc." in the United States, "plc" or "Ltd" in Commonwealth countries, "S.A." in many Romance-language countries, "AG" in Germany, "K.K." in Japan, and "S.A.E." in Egypt. Certain jurisdictions do not allow the use of the word "company" alone to denote corporate status, since the word "company" may refer to a partnership or to a sole proprietorship, or even, archaically, to a group of not necessarily related people (for example, those staying in a tavern).

Terms like those on the list above, known as words of limitation, obviously vary by jurisdiction and language. Their use puts all persons on constructive notice that they have to deal with an entity whose liability remains limited, in the sense that it does not reach back to the persons who constitute the entity; one can only collect from whatever assets the entity still controls at the time one obtains a judgment against it.

Unresolved issues

The nature of the corporation continues to evolve, both through existing corporations pushing new ideas and structures, and governments regulating them in response to new situations. A current question is that of diffused responsibility: for example, if the corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, management and staff of the corporation? The present law diffuses this responsibility. One may think that the owners of the business - the shareholders - should be ultimately responsible for such circumstances, but the modern corporation may have many millions of small-scale shareholders who know nothing about its business activities. Worse still, traders - especially hedge funds - may rapidly turn over their partial ownership of a corporation many times a day. One suggestion is that the directors should be passed the burden of moral and legal responsibility as part of their job of representing the shareholders. This is currently an active area of debate.

Origins

Etymology

The word "corporation" derives from the Latin corpus (body), representing a "body of people"; that is, a group of people authorized to act as an individual (Oxford English Dictionary). The word universitas also used to refer to a group of people but now refers specifically to a group of scholars (see University). In the United Kingdom and Republic of Ireland, the term corporation was also used for the local government body in charge of a borough. This style was replaced in most cases with the term council in the United Kingdom in 1973, and in the Republic of Ireland in 2001. The sole exception is the Corporation of London which retains the title.

Pre-modern corporations

Corporations have been present in some forms as far back as Ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, they nonetheless were enterprises, sanctioned by the state, with a form of shareholders who invested money for a specific purpose.

With the collapse of the Roman Empire, the rise of Christianity and the influx of Germanic tribes, the Roman conception of the corporation merged with other views. Germanic tribes, for example, maintained that a group entity in and of itself could have a separate identity from that of its members.

These influences came together in the body of canon law built around the conception of the church as corporate structure in the Middle Ages. Different theories of the church as corporate body were favored by different individuals but all agreed on one key component: that the church was more than just its members and could maintain an existence perpetually, regardless of the death of any individual member.

This, together with discussion as to the relationship between the head of a corporation (such as the Pope) and its members, contributed not only to the development of modern corporations and corporate theory but also set the stage for many ideas that would come to fruition during the enlightenment. Kenneth Pomeranz, an economic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war) accounts for the development of this economic structure in Europe but not in China or in the Middle East.

Older corporate entities gained incorporation as "the person/people of xx". This reflected the people who made up the "body" and also emphasised their legal identity. The law classifies a corporation either as a corporation sole (one person) or as a corporation aggregate (any other number).

Examples include (the link gives the legal name; the nickname appears in brackets with the nature of the corporation)

The Governor and Company of the Bank of England (Bank of England — corporation aggregate)
The Chancellor Masters and Scholars of the University of Cambridge (Cambridge University — corporation aggregate)
The President and Fellows of Harvard College (Harvard College — corporation aggregate)
Her Majesty the Queen in Right of New Zealand (New Zealand Government — corporation sole)
The Archbishop of Canterbury (corporation sole)
The Dean, Chapter and Students of the Cathedral Church of Christ in Oxford of the Foundation of King Henry VIII (Christ Church, Oxford — corporation aggregate)

Using strict definitions, universities and colleges count as corporations since they merely comprise groups of people.

Development of modern commercial corporations

Image:Vereinigte Ostindische Compagnie (VOC)share.jpg

A bond issued by the Dutch East India Company, dating from 7 November 1623, for the amount of 2,400 florins

Early corporations of the commercial sort were formed under frameworks set up by governments of states to undertake tasks which appeared too risky or too expensive for individuals or governments to embark upon. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, reportedly obtained a charter from King Magnus Eriksson in 1347. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company, and these corporations came to play a large part in the history of corporate colonialism.

In the United States, government chartering began to fall out of vogue in the mid-1800s. Corporate law at the time was very restrictive and very closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and the corporation's activities were tightly restricted to its express purposes. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the economic value of providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state. Delaware followed, and soon became known as the most corporation-friendly state in the country; even today, most major public corporations are set up under Delaware law.

The 20th century saw a proliferation of enabling law across the world, which helped to drive economic booms in many countries before and after World War I. After World War II, and especially starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly-owned services and enterprises to private, normally corporate, ownership. Deregulation - reducing the public-interest regulation of corporate activity - often accompanied privatization as part of an ideologically laissez-faire policy. Another major postwar shift was toward conglomerates, in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. While corporate efficiency (and profitability) skyrocketed, small shareholder control was diminished and directors of corporations assumed greater control over business, contributing in part to the hostile takeover movement of the 1980s and the accounting scandals that brought down Enron and WorldCom following the turn of the century.

More recent corporate developments include downsizing, contracting-out, off-shoring and scoping down activities to core business, as information technology, global trade regimes, and cheap fossil fuels enable corporations to reduce labour costs, transportation costs and transaction costs, and thereby maximize profits.

For a history of corporations that is “pro-corporate”, see John Micklethwait and Adrian Wooldridge, The Company: a Short History of a Revolutionary Idea (New York: Modern Library, 2003). For a history of corporations that is “critical”, see Joel Bakan, The Corporation. The pathological pursuit of profit and power (Toronto: Viking Canada, 2004).

Types of corporations

For-profit and non-profit

Main article: non-profit organization

In modern economic systems, the corporate conventions of governance commonly appear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, the courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or in a similar manner) when applying principles to non-profit organizations — as the underlying structures of these two types of entity often resemble each other.

Closely-held and public

The institution most often referenced when the word "corporation" is used, as in the title of the movie The Corporation, is a public or publicly traded corporation, the shares of which are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public. Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of ownership interests. Many such corporations are owned and managed by a small group of businesspeople or companies, although the size of such a corporation can be as vast as the largest public corporations.

The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is that publicly traded corporations have an additional burden of complying with securities laws, which (especially in the U.S.) grant further rights to stockholders to protect them from fraud or unfairness in connection with the sale and purchase of stock. The publicly traded corporation must usually follow much more stringent disclosure requirements, and sometimes additional procedural obligations in connection with major transactions (e.g. mergers) or events (e.g. elections of directors).

Multinational corporations

Following on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations: growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of globalising.

The typical "transnational" or "multinational" may fit into a web of overlapping ownerships and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favour national or regional branches; growth by acquisition or merger can result in a plethora of groupings scattered around and/or spanning the globe, with structures and names which do not always make clear the structures of ownership and interaction.

In the spread of corporations across multiple continents, the importance of corporate culture has grown as a unifying factor and a counterweight to local national sensibilities and cultural awareness.

National features

There are various types of corporations throughout the world.

United States

In the United States, several corporate forms exist; the name of "corporation" generally applies to a business, run for profit, to which one of the states of the United States has granted a corporate charter. American corporations often charter as a Delaware Corporation in Delaware, which charges no tax on activities outside the state and has courts experienced in commercial law. Corporations set up for privacy or asset protection often charter in Nevada, which allows setting them up with no record of who owns them. The federal government of the United States usually does not grant corporate charters, except for some special instances such as Amtrak and Freddie Mac and banks and credit unions which opt not to receive charters from their home states.

Historically, most U.S. states issued charters for fixed lengths of time (for example, a manufacturing corporation might receive a charter good for 40 years), and only by an act of the legislature. In theory, a limited charter forced corporations to remain accountable to government (that is, to the community) for the special privileges granted to them. Investors protested that it actually led to unhealthy amounts of political payoffs and graft. Most states now charter unlimited-term corporations for a small fee, and possibly for a yearly tax.

Legally, corporations are accorded some corporate personhood, i.e. Constitutional rights similar to those held by persons. The U.S. Supreme Court ruled on this question in the 1886 case Santa Clara County v. Southern Pacific Railroad.

Many countries around the world now have corporate laws based upon state laws from the United States. For example, corporations in Japan are organized under a variant of the corporate law of Illinois, and corporations in Saudi Arabia follow corporate laws copied from New York.

Canada

In Canada both the federal government and the provinces have corporate statutes, and thus a corporation may have a provincial or a federal charter. Many older corporations in Canada stem from Acts of Parliament passed before the introduction of general corporation law. The oldest corporation in Canada, and in North America, is the Hudson's Bay Company, chartered in 1670. Federally recognized corporations are regulated by the Canada Business Corporations Act

German-speaking countries

Germany, Austria and Switzerland recognize two forms of corporation: the Aktiengesellschaft (AG), analogous to public corporations in the English-speaking world, and the Gesellschaft mit beschränkter Haftung (GmbH), similar to (and an inspiration for) the modern limited liability company.

See also

Corporate taxation

In many countries, including the United States and United Kingdom, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is often referred to as "double taxation," because any profits distributed to shareholders will eventually be taxed twice.

Where a double taxation system exists, the additional tax burden is often an incentive for smaller businesses to organize in the form of a partnership, limited liability company, or other type of entity that is not separately taxed. Such entities are often called "pass-through entities."

In the United States, business corporations owe taxes according to two basic categories. A "C corporation" must pay corporate taxes, while "S corporations" pay no corporate taxes but instead pass profits and losses directly to their owners (the stockholders) who declare such profits and losses as part of their personal taxable income. An S corporation must generally have no more than 75 stockholders, all of them natural persons (not other corporations or entities), and all of them residing in the United States; moreover, the S corporation can only issue a single class of stock. As a result of these restrictions, all publicly traded corporations and many larger close corporations have C corporation status. Certain kinds of investment companies are also exempt from corporate income taxes, provided they distribute almost all of their income to shareholders in the form of dividends or capital gains distributions.

Other commercial entities

Several other forms of business entity exist under the laws of various countries. These include:

Quotes

Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like. —Lord Thurlow

An ingenious device for obtaining individual profit without individual responsibility. —"Corporation" as defined by Ambrose Bierce in The Devil's Dictionary

The opinion of the Court, after mature deliberation, is that this [a corporate charter] is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. —Chief Justice John Marshall, Dartmouth College v. Woodward (1819).

Further reading

Klein and Coffee. Business Organization and Finance: Legal and Economic Principles (Foundation, 2002), ISBN 158778713X
Hessen, Robert. In Defense of the Corporation. (Hoover Institute 1979), ISBN 081797072X
Kirzner, Israel M. Competition and Entrepreneurship (University of Chicago Press, 1973), ISBN 0226437760
Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.
Conard, Alfred F. Corporations in Perspective. 1976.
John Micklethwait and Adrian Wooldridge, The Company: a Short History of a Revolutionary Idea (New York: Modern Library, 2003).
Joel Bakan, The Corporation. The pathological pursuit of profit and power (Toronto: Viking Canada, 2004).

See also

Lists

Lists of companies

Documentary

The Corporation (a 2003 documentary film about "today's dominant institution")

External links

Corporations — article by Robert Hessen
Company Formation Glossary
Gangs of America by Ted Nace — A free book on historical and legal bases of Corporationsde:Unternehmen

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