Everything about Corporation totally explained
A
corporation is a legal entity (technically, a
juristic person) which has a legal personality distinct from those of its members.
The defining legal rights and obligations of a corporation consist of the capacities (i) to sue and to be sued, (ii) to have assets, (iii) to employ agents, (iv) to engage in contracts, and (v) to make
by-laws governing its internal affairs. Other legal rights and obligations may be assigned to the corporation by governments or courts. These are often controversial.
Stewart Kyd, the author of the first treatise on
corporate law in English, defined a corporation as "a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence."
Currently, the
modern business corporation is the dominant type of corporation. In addition to its
legal personality, the modern business corporation has at least three other legal characteristics: (i) transferable shares (shareholders can change without affecting its status as a
legal entity), (ii) perpetual succession capacity (its possible continued existence despite shareholders' death or withdrawal), (iii) and limited liability (including, but not limited to: the shareholders' limited responsibility for corporate debt, insulation from judgments against the corporation, shareholders' amnesty from criminal actions of the corporation, and, in some jurisdictions, limited liability for corporate officers and directors from criminal acts by the corporation).
In
common law countries, classic statement of this principle is found in
Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]
AC 705, 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 regulations most favorable to
incorporation include:
Limited liability: Unlike in a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations. As a result their potential losses can't exceed the amount which they contributed to the corporation as dues or paid for shares. Limited liability regulations enable corporations to socialize their costs for the primary benefit of shareholders. The economic rationale for this lies in the fact that it allows anonymous trading in the shares of the corporation by virtue of eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor wouldn't likely allow any share to be sold to a buyer of at least equivalent creditworthiness as the seller. Limited liability further allows corporations to raise tremendously more funds for enterprises by combining funds from the owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This in turn greatly reduces the risk for potential shareholders and increases both the number of willing shareholders and the amount they're likely to invest.
; Perpetual lifetime: Another favorable regulation, the assets and structure of the corporation exist beyond the lifetime of any of its shareholders, bondholders, or employees. This allows for stability and accumulation 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) wouldn't generate the feudal fees that a lord could claim upon a landholder's death. In this regard, see Statute of Mortmain. It is important to note that the "perpetual lifetime" feature is an indication of the unbounded potential duration of the corporation's existence, and its accumulation of wealth and thus power. (In theory, a corporation can have its charter revoked at any time, putting an end to its existence as a legal entity. However, in practice, dissolution only occurs for corporations that request it or fail to meet annual filing requirements.)
Ownership and control
Persons and other legal entities composed of persons (such as
trusts and other corporations) can have the right to vote or share in the profit of corporations. In the case of for-profit corporations, these voters hold
shares of stock and are thus called shareholders or stockholders. When no stockholders exist, a corporation may exist as a
non-stock corporation, and instead of having stockholders, the corporation has members who have the right to vote on its operations. If the non-stock corporation isn't operated for profit, it's called 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 provided to ordinary unincorporated businesses, to
voluntary associations, or to groups of individuals.
For the purposes of the next few paragraphs, the term "members" will be used to refer to stockholders of a stock corporation and members of a non-stock corporation.
There are two broad classes of corporate governance forms in the world. In most of the world, control of the corporation is determined by a
board of directors which is elected by the shareholders. In some jurisdictions, such as Germany, the control of the corporation is divided into two tiers with a
supervisory board which elects a
managing board. Germany is also unique in having a system known as
co-determination in which half of the supervisory board consists of representatives of the employees.
The
CEO, president, treasurer, and other titled officers are usually chosen by the board to manage the affairs of the corporation.
In addition to the influence of shareholders, corporations can be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a controlling interest analogous to that of a member, including one or more seats on the board of directors. In some jurisdictions, such as Germany and Japan, it's standard for banks to own shares in corporations whereas in other jurisdictions such as the United States and the United Kingdom banks are prohibited from owning shares in external corporation.
Members of a corporation (except for non-profit corporations) are said to have a "residual interest." Should the corporation end its existence, the members 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, a diverse investment portfolio minimizes this risk. In addition, shareholders receive the benefit of limited liability regulations, making shareholders liable for only the amount they contributed. This only applies in the case of for-profit corporations; non-profits are not allowed to have residual benefits available to the members.
Formation
Historically, corporations were created by special
charter of governments. Today, corporations are usually registered with the state, province, or national government and become regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must in many cases be required to designate the principal address of the corporation as well as a
registered agent (a person or company that's designated to receive legal service of process). As part of the registration, it may also be required to designate an
agent or other legal representative of the corporation depending on the filing jurisdiction.
Generally, a corporation files
articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it's 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 jurisdiction 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's 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, some 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 doesn't 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 based on their
Provincial Sales Tax registration number (for example, "12345678 Ontario Limited").
In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity. These terms vary by jurisdiction and language. In some jurisdictions they're mandatory, and in others they're not. Their use puts all persons on
constructive notice that they've to deal with an entity whose
liability remains limited, in the sense that it doesn't 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.
Certain jurisdictions don't 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).
Unresolved issues
The nature of the corporation continues to evolve in response to new situations as existing corporations promote new ideas and structures, the courts respond, and governments issue new regulations. A question of long standing is that of diffused responsibility. For example, if a corporation is found liable for a death, how should culpability and punishment for it be allocated among shareholders, directors, management and staff, and the corporation itself? See
corporate liability, and specifically,
corporate manslaughter.
The law differs among jurisdictions, and is in a state of flux. Some argue that shareholders should be ultimately responsible in such circumstances, forcing them to consider issues other than profit when investing, but a corporation may have millions of small shareholders who know nothing about its business activities. Moreover, traders — especially
hedge funds — may turn over shares in corporations many times a day.The issue of corporate repeat offenders (see H. Glasbeak, "Wealth by Stealth: Corporate Crime, Corporate Law, and the Perversion of Democracy" (Between the Lines Press: Toronto 2002) raises the question of the so-called "death penalty for corporations."
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 Great Britain and 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 Britain in 1970s local government reform, and in the Republic of Ireland in the 1990s. The sole exceptions are the
City of London Corporation and
Laugharne Corporation.
Pre-modern corporations
Corporations have been present in some forms as far back as
ancient India and
ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, they nonetheless were enterprises with a form of shareholders who invested money for a specific purpose. Such corporations in the
Roman Empire were sanctioned by the state, while such corporations in the
Maurya Empire were mostly private commercial entities.
With the collapse of the Roman Empire, 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.
The law classifies a corporation either as a
corporation sole (one person) or as a
corporation aggregate (any other number).
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, 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 or the
Hudson's Bay Company, and these corporations came to play a large part in the history of
corporate colonialism.
During the period of colonial expansion, in the seventeenth century, the true progenitors of the modern Corporation emerged as the "chartered company". Acting under a charter sanctioned by the Dutch monarch, the
Vereenidge Oost-Indische Compagnie (VOC), or the
Dutch East India Company, defeated
Portuguese forces and established itself in the
Moluccan Islands in order to profit off the
European demand for
spices. Investors in the VOC were issues paper certificates as proof of share ownership, and were able to trade their shares on the original
Amsterdam stock exchange. Shareholders are also explicitly granted
limited liability in the company's royal charter.
Labeled by both contemporaries and historians as "the grandest society of merchants in the universe", the
British East India Company would come to symbolize the dazzingly rich potential of the corporation, as well as new methods of business that could be both brutal and exploitive. On December 31, 1600, the
English monarchy granted the company a fifteen-year monopoly on trade to and from the
East Indies and
Africa. By 1611 shareholders in the East India Company were earning an almost 150%
return on their investment. Subsequent stock offerings demonstrated just how lucrative the Company had become. Its first stock offering in 1613-1616 raised ₤418,000, and its second offering in 1617-1622 raised ₤1.6 million.
In the
United States, government chartering began to fall out of vogue in the mid-1800s. Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were 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 corporations were required to comply with the purposes expressed in their charters. 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 greater corporate registration revenues available by 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 after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realized, but by then it was too late; even today, most major public corporations are set up under Delaware law.
By the beginning of the nineteenth century, government policy on both sides of the Atlantic began to change, reflecting the growing popularity of the proposition that corporations were riding the economic wave of the future. In 1819, the U.S. Supreme Court granted corporations a plethora of rights they hadn't previously recognized or enjoyed. Corporate charters were deemed "inviolable," and not subject to arbitrary amendment or abolition by state governments. The Corporation as a whole was labeled an "artificial person," possessing both individuality and immortality.
At around the same time as the above events were occurring in the United States, British legislation was similarly freeing the corporation from the shackles of historical restrictions. In 1844
British Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter or an additional act of Parliament. Ten years later, England enshrined into law the preeminent hallmark of modern corporate law - the concept of
limited liability. Acting in response to increasing pressure from newly emerging capital interests, Parliament passed the Limited Liability Act of 1855, which established the principle that any corporation could enjoy limited legal liability on both contract and tort claims simply by registering as a "limited" company with the appropriate government agency.
This revolutionary switch from unlimited to limited liability prompted a writer for the English periodical
Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated." The glaring inaccuracy of the second part of this judgment was recognized by the same magazine more than seventy-five years later, when it claimed that, "[t]he economic historian of the future . . . may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with
Watt and
Stephenson, and other pioneers of the
Industrial Revolution."
Development of modern commercial corporations
By the end of the nineteenth century the forces of limited liability, state and national deregulation, and vastly increasing capital markets had come together to give birth to the corporation in its modern-day form. In the well-known
Santa Clara County v. Southern Pacific Railroad decision, the then-Chief Justice of the United States Supreme Court declared that corporations were recognized legal persons, protected by the equal protection clause of the fourteenth amendment. Beginning with
New Jersey and
Delaware, U.S. States engaged in a
race to the bottom in their attempts to create more and more liberal and therefore, lucrative incorporation regulations. The decline of restrictions on
mergers and acquisitions encouraged a wave of corporate consolidation: from 1898 to 1904, 1,800 U.S. corporations were consolidated into 157. The modern corporate era had begun.
The 20th century saw a proliferation of enabling law across the world, which some argue helped to drive economic booms in many countries before and after World War I. Starting in the 1980s, many countries with large state-owned corporations moved toward
privatization, the selling of publicly owned services and enterprises to corporations.
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 the development of
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.
Types of corporations
» For a list of types of corporation and other business types by country, see Types of business entity.
Most corporations are registered with the local jurisdiction as either a stock corporation or a non-stock corporation. Stock corporations sell stock to generate capital. A stock corporation is generally a for-profit corporation. A
non-stock corporation doesn't have stockholders, but may have members who have voting rights in the corporation.
Some jurisdictions (
Washington, D.C., for example) separate corporations into for-profit and non-profit, as opposed to dividing into stock and non-stock.
For-profit and non-profit
In modern economic systems, conventions of
corporate 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 by the word "corporation" is a
public or
publicly traded corporation, the shares of which are traded on a public stock exchange (for example, the
New York Stock Exchange or
Nasdaq in the United States) where shares of stock of corporations are bought and sold 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 shares. 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.
Closely held corporations do have some advantages over publicly traded corporations. A small, closely held company can often make company-changing decisions much more rapidly than a publicly traded company. A publicly traded company is also at the mercy of the market, having capital flow in and out based not only on what the company is doing but the market and even what the competitors are doing. Publicly traded companies also have advantages over their closely held counterparts. Publicly traded companies often have more
working capital and can delegate debt throughout all shareholders. This means that people invested in a publicly traded company will each take a much smaller hit to their own capital as opposed to those involved with a closely held corporation. Publicly traded companies though suffer from this exact advantage. A closely held corporation can often voluntarily take a hit to profit with little to no repercussions (as long as it isn't a sustained loss). A publicly traded company though often comes under extreme scrutiny if profit and growth are not evident to stock holders, thus stock holders may sell, further damaging the company. Often this blow is enough to make a small public company fail.
Often communities benefit from a closely held company more so than from a public company. A closely held company is far more likely to stay in a single place that has treated them well, even if going through hard times. The shareholders can incur some of the damage the company may receive from a bad year or slow period in the company profits. Workers benefit in that closely held companies often have a better relationship with workers. In larger, publicly traded companies, often when a year has gone badly the first area to feel the effects are the work force with lay offs or worker hours, wages or benefits being cut. Again, in a closely held business the shareholders can incur this profit damage rather than passing it to the workers. Closely held businesses are also often known to be more
socially responsible than publicly traded companies.
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 the burden of complying with additional securities laws, which (especially in the U.S.) may require additional periodic disclosure (with more stringent requirements), stricter corporate governance standards, and additional procedural obligations in connection with major corporate transactions (for example mergers) or events (for example elections of directors).
A closely held corporation may be a
subsidiary of another corporation (its
parent company), which may itself be either a closely held or a public corporation.
Mutual benefit corporations
A mutual benefit nonprofit corporation is a corporation formed in the United States solely for the benefit of its members. An example of a mutual benefit nonprofit corporation is a golf club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide, in its corporate bylaws, how many members to have, and who can be a member. Generally, while it's a nonprofit corporation, a mutual benefit corporation isn't a charity. Because it isn't a charity, a mutual benefit nonprofit corporation can't obtain 501(c)(3) status. If there's a dispute as to how a mutual benefit nonprofit corporation is being operated, it's up to the members to resolve the dispute since the corporation exists to solely serve the needs of its membership and not the general public.
Multinational corporations
multinational corporations: growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of
globalizing.
The typical "transnational" or "multinational" may fit into a web of overlapping shareholders and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favor 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 don't always make clear the structures of shareholder 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.
Australia
In
Australia corporations are registered and regulated by the Commonwealth Government through the
Australian Securities and Investments Commission. Corporations law has been largely codified in the
Corporations Act 2001.
Brazil
In
Brazil there are many different types of corporations ("sociedades"), but the two most common ones commercially speaking are: (i) "sociedade limitada", identified by "Ltda." after the company's name, equivalent to the British limited company, and (ii) "sociedade anônima" or "companhia", identified by "SA" or "Companhia" in the company's name, equivalent to the British public limited company. The "Ltda." is mainly governed by the new Civil Code, enacted in 2002, and the "SA" by the Law 6.404 dated
15 December 1976.
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 is the
Hudson's Bay Company; though its business has always been based in Canada, its
Royal Charter was issued in England by
King Charles II in 1670, and became a Canadian charter by amendment in 1970 when it moved its corporate headquarters from London to Canada. Federally recognized corporations are regulated by the
Canada Business Corporations Act.
German-speaking countries
Germany,
Austria,
Switzerland and
Liechtenstein 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.
Italy
Italy recognises two forms of companies with limited liability: "S.r.l", or "Società a Responsabilità Limitata" (similar to
Limited liability company) and "S.p.A" or "Società Per Azioni" (similar to American stock corporation).
United Kingdom
In the
United Kingdom, 'corporation' most commonly refers to a
body corporate formed by
Royal Charter or by statute, of which few now remain. The
BBC is the oldest and best known corporation still in existence. Others, such as the
British Steel Corporation, were
privatized in the 1980s.
In the private sector, corporations are referred to in law as companies, and are regulated by the
Companies Act 2006 (or the
Northern Ireland equivalent). The most common type of company is the private
limited company ("Limited" or "Ltd."). Private limited companies can either be limited by shares or by guarantee. Other corporate forms include the
public limited company ("PLC") and the
unlimited company.
United States
Several types of corporations exist in the
United States. Generically, any business entity that's recognized as distinct from the people who own it (for example, isn't a sole proprietorship or a partnership) is a corporation. This generic label includes entities that are known by such legal labels as ‘association’, ‘organization’ and ‘limited liability company’, as well as corporations proper. Only a company that has been formally incorporated according to the laws of a particular state is called ‘corporation’. American corporations can be either profit-making companies or non-profit entities. Tax-exempt non-profit corporations are often called “501(c)3 corporation”, after the section of the
Internal Revenue Code that addresses their tax exemption.
Corporations are created by filing the requisite documents with a particular state government. The process is called “incorporation,” referring to the abstract concept of clothing the entity with a "veil" of artificial personhood (embodying, or “corporating” it, ‘corpus’ being the Latin word for ‘body’). Only certain corporations, including banks, are chartered. Others simply file their articles of incorporation with the state government as part of a registration process.
The
federal government can only create corporate entities pursuant to relevant powers in the
U.S. Constitution. For example, Congress has constitutional power to regulate banking, so it has power to charter federal banks. Additionally, Congress has power to create and own corporations that serve a purpose of the federal government, such as
Amtrak or the
Federal Deposit Insurance Corporation.
Once incorporated, the corporation has artificial personhood everywhere it may operate, until such time as the corporation may be dissolved. A corporation that operates in one state while being incorporated in another is a “foreign corporation.” This label also applies to corporations incorporated outside of the United States. Foreign corporations must usually register with the secretary of state’s office in each state to lawfully conduct business in that state.
A corporation is legally a citizen of the state (or other jurisdiction) in which it's incorporated (except when circumstances direct the corporation be classified as a citizen of the state in which it has its head office, or the state in which it does the majority of its business). Corporate business law differs from state to state, and many prospective corporations choose to incorporate in a state whose laws are most favorable to its business interests. Many large corporations are incorporated in
Delaware, for example, without being physically located there because that state has very favorable corporate tax and disclosure laws.
Companies set up for
privacy or asset protection often incorporate in
Nevada, which doesn't require disclosure of share ownership. Many states, particularly smaller ones, have modeled their corporate statutes after the
Model Business Corporation Act, one of many model sets of law prepared and published by the
American Bar Association.
As
juristic persons, corporations have certain rights that attach to natural purposes. The vast majority of them attach to corporations under state law, especially the law of the state in which the company is incorporated – since the corporations very existence is predicated on the laws of that state. A few rights also attach by federal constitutional and statutory law, but they're few and far between compared to the rights of natural persons. For example, a corporation has the personal right to bring a lawsuit (as well as the capacity to be sued) and, like a natural person, a corporation can be libeled.
But a corporation has no constitutional right to freely exercise its religion because religious exercise is something that only "natural" persons can do. That is, only human beings, not business entities, have the necessary faculties of belief and spirituality that enable them to possess and exercise religious beliefs.
Harvard College (a component of
Harvard University), formally the
President and Fellows of Harvard College (also known as the Harvard Corporation), is the oldest corporation in the western hemisphere. Founded in 1636, the second of Harvard’s two governing boards was incorporated by the
Great and General Court of Massachusetts in 1650. Significantly, Massachusetts itself was a corporate colony at that time – owned and operated by the Massachusetts Bay Company (until it lost its charter in 1684) - so Harvard College is a corporation created by a corporation.
Many nations have modeled their own corporate laws on American business law. Corporate law in
Saudi Arabia, for example, follows the model of New York State corporate law.
In addition to typical corporations in the United States, the federal government, in 1971 passed the
Alaska Native Claims Settlement Act (ANCSA), which authorized the creation of 12 regional native corporations for
Alaska Natives and over 200 village corporations that were entitled to a settlement of land and cash. In addition to the 12 regional corporations, the legislation permitted a thirteenth regional corporation without a land settlement for those Alaska Natives living out of the
State of Alaska at the time of passage of ANCSA.
Corporate taxation
In many countries corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as "
double taxation", because any profits distributed to shareholders will eventually be taxed twice. One solution to this (as in the case of the Australian and UK tax systems) is for the recipient of the dividend to be entitled to a tax credit which addresses the fact that the profits represented by the dividend have already been taxed. The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend. In other systems, dividends are taxed at a lower rate than other income (for example in the US) or shareholders are taxed directly on the corporation's profits and dividends are not taxed (for example
S corporations in the US).
Criticisms and counter-point
A particularly common line of criticism of the corporation was articulated by Lord Edward Thurlow who stated:
"Neither body to jail nor soul to damn."
Adam Smith in the
Wealth of Nations criticized the
joint-stock company corporate form because of the separation of ownership and management.
The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it can't well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
The context for Adam Smith’s term for “companies” in the
Wealth of Nations was the joint-stock company. In the 18th century, the joint-stock company was a distinct entity created by the King of Great Britain as Royal Charter trading companies. These entities were awarded legal
monopoly in designated regions of the world, such as the
British East India Company.
Furthermore the context of the quote points to the complications inherent in chartered joint-stock companies. Each company had a Courts of Governors and day-to-day duties were overseen by local managers. Governor supervision of day-to-day operations was minimal and was exacerbated by the
geography of the 18th century.
The sailing time from India to Great Britain was many months and round trip routes often took a year or longer. It was during the interim time period that local managers took advantage of the time delay by plundering the local population at the expense of the interests of shareholders. Bribery and corruption were inherent in this type of corporate model as the local managers sought to avoid close supervision by the Courts of Governors, politicians, and Prime Ministers. In these circumstances, Smith didn't consider joint-stock company governance to be honest. More importantly, the East India Company demonstrated inherent flaws in the corporate form. The division between owners and managers in a joint-stock company, and the limited legal liability this division was based on guaranteed that stockholders would be apathetic about a company's activities as long as the company continued to be profitable. Just as problematic, the
laws of agency upon which the corporate form was based allowed for boards of directors to be so autonomous from and unconstrained by stockholder wishes that directors became negligent and ultimately self-interested in the management of the corporation.
Legal Scholar and Professor of Law at the
University of British Columbia Joel Bakan describes the modern corporate entity as 'an institutional psychopath' and a 'psychopathic creature.' In the documentary
The Corporation, Bakan claims that corporations, when considered as natural living persons, exhibit the traits of
antisocial personality disorder or
psychopathy. Also in the film, Robert Monks, a former
Republican Party candidate for Senate from
Maine, claims that:
"The corporation is an externalizing machine (moving its operating costs to external organizations and people), in the same way that a shark is a killing machine."
Noam Chomsky has criticized the legal decisions that led to the creation of the modern corporation:
Corporations, which previously had been considered artificial entities with no rights, were accorded all the rights of persons, and far more, since they're "immortal persons", and "persons" of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints.
Recent events in corporate America may suggest that exploitive behavior common during the time of
Adam Smith may not be a mere historical curiosity.
Influential scholars
Frank Easterbrook and
Daniel Fischel, as an aside to their primary thesis, limitedly argue that if wealth-maximization is a normative priority of societal policy, then corporate law serves the general welfare by mimicking, without the heavy cost of negotiation, the contractual agreements that would be reached by shareholders, managers and employees. For example:
"Limited liability decreases the need to monitor agents. To protect themselves [inits absence], investors could monitor their agents more closely. The more risk they bear, the more that'll monitor. But beyond a point extra monitoring isn't worth the cost. Moreover, specialized risk bearing implies that many investors will have diversified holdings. Only a portion of their wealth will be invested in one firm. These diversified investors have neither the expertise nor the incentive to monitor the actions of more specialized agents. Limited liability makes diversification and passivity a more rational strategy and so potentially reduces the cost of operating the corporation."
Other business entities
Almost every recognized type of organization carries out some economic activities (for example the
family). Other organizations that may carry out activities that are generally considered to be
business exist under the laws of various countries. These include:
Footnotes
Further Information
Get more info on 'Corporation'.
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