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Corporation



Main article: Delaware corporation

Several types of corporations exist in the United States. Generically, any business entity that is recognized as distinct from the people who own it (i.e., is not 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 is 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 does not 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 are 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.

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Corporate taxation

Main article: Corporate tax

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 (e.g. in the US) or shareholders are taxed directly on the corporation's profits and dividends are not taxed (e.g. S corporations in the US).

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Corporations' criticism

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 cannot 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 did not consider joint-stock company governance to be honest.[29] 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.[30]

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."[31]

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 are "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.[32]

Recent events in corporate America may suggest that exploitive behavior common during the time of Adam Smith may not be a mere historical curiosity.[33]

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 [in its absence], investors could monitor their agents more closely. The more risk they bear, the more they will monitor. But beyond a point extra monitoring is not 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."[34]

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Other business entities

Almost every recognized type of organization carries out some economic activities (e.g. 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:

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See also

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Footnotes

  1. ^ Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. [1974] 1 WLR 1133; Walton J actually attributes the term to his counsel, Mr Price, quoting Lord Haldane. But Lord Haldane never used such figurative words. They may trace back to Lord Chancellor Thurlow (1731–1806), who is said to have asked rhetorically, "did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?" Though it seems his exact phrase was, "Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like." John Poynder Literary Extracts (1844) vol. 1, p. 2 or 268
  2. ^ e.g. South African Constitution Art.8, epsecially Art.(4)
  3. ^ Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993) has a very good discussion of the controversial nature of additional rights being granted to corporations.
  4. ^ e.g. Corporate Manslaughter and Corporate Homicide Act 2007
  5. ^ Hansmann et al, The Anatomy of Corporate Law (2004) Ch.1, p.2; See also, C. A. Cooke, Corporation, Trust and Company: A Legal History, (1950).
  6. ^ Vikramaditya S. Khanna (2005). The Economic History of the Corporate Form in Ancient India. University of Michigan.
  7. ^ Om Prakash, European Commercial Enterprise in Pre-Colonial India (Cambridge University Press, Cambridge 1998).
  8. ^ A Treatise on the Law of Corporations, Stewart Kyd (1793-1794)
  9. ^ John Keay, The Honorable Company: A History of the English East India Company (MacMillan, New York 1991).
  10. ^ Ibid. at 113.
  11. ^ The Law of Business Organizations[1]
  12. ^ Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819).
  13. ^ Id. at 25.
  14. ^ Id. at 45.
  15. ^ Sean M. O'Connor, Be Careful What You Wish For: How Accountants and Congress Created the Problem of Auditor Independence, 45 B.C.L. Rev. 741, 749 (2004).
  16. ^ Limited Liability Act, 18 & 19 Vict., ch. 133 (1855)(Eng.), cited in Paul G. Mahoney, Contract or Concession? An Essay on the History of Corporate Law, 34 Ga. L. Rev. 873, 892 (2000).
  17. ^ Graeme G. Acheson & John D. Turner, The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914, School of Management and Economics, Queen's University of Belfast, available at [2].
  18. ^ Economist, December 18, 1926, at 1053, as quoted in Majoney, supra, at 875.
  19. ^ For a comparison of the differences between the "Classic Corporation" (before 1860) and the "Modern Corporation" (after 1900), see Ted Nace, Gangs of America: The Rise of Corporate Power and the Disabling of Democracy 71 (Berrett-Koehler Publishers, Inc., San Francisco 2003).
  20. ^ Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power 14 (Free Press, New York 2004).
  21. ^ Id.
  22. ^ Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
  23. ^ Hansmann et al, The Anatomy of Corporate Law, pg 7.
  24. ^ A leading case in common law is Salomon v. Salomon & Co. [1897] AC 22.
  25. ^ The U.S. state of California is an example of a jurisdiction that does not require corporations to indicate corporate status in their names, except for close corporations. The drafters of the 1977 revision of the California General Corporation Law considered the possibility of forcing all California corporations to have a name indicating corporate status, but decided against it because of the huge number of corporations that would have had to change their names, and the lack of any evidence that anyone had been harmed in California by entities whose corporate status was not immediately apparent from their names. However, the 1977 drafters were able to impose the current disclosure requirement for close corporations. See Harold Marsh, Jr., R. Roy Finkle, Larry W. Sonsini, and Ann Yvonne Walker, Marsh's California Corporation Law, 4th ed., vol. 1 (New York: Aspen Publishers, ), 5-15 — 5-16.
  26. ^ See, for example, the Ontario's Environmental Protection Act.
  27. ^ CorpWatch : The Death Penalty for Corporations Comes of Age
  28. ^ Official website of the Secretary of State, for the (United States) state of Vermont
  29. ^ Adam Smith The Lost Legacy.com
  30. ^ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations 741 (Clarendon, Oxford 1776).
  31. ^ Bakan, Joel (writer) The Corporation (2003) (Documentary)
  32. ^ Robert Barksky, Noam Chomsky and the Law [3]
  33. ^ The fall of the Enron corporation stemmed largely from the company's attempt to create new energy trading markets, and its strategy of trading paper wealth in order to maintain the appearance of profitability. For a thorough analysis of Enron's missteps and ultimate destruction, see Kurt Eichenwald, Conspiracy of Fools (Broadway Books, New York 20050.
  34. ^ The Economic Structure of Corporate Law 1991.

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References

  • A Comparative Bibliography: Regulatory Competition on Corporate Law
  • Sobel, Robert. The Age of Giant Corporations: a Microeconomic History of American Business. (1984)
  • Klein and Coffee. Business Organization and Finance: Legal and Economic Principles. Foundation. 2002. ISBN -X
  • Hessen, Robert. In Defense of the Corporation. Hoover Institute. 1979. ISBN -X
  • Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.
  • Conard, Alfred F. Corporations in Perspective. 1976.
  • Dignam, A and Lowry, J (2006) Company Law, Oxford University Press ISBN-13: 978-0-19-928936-3
  • John Micklethwait and Adrian Wooldridge. The Company: a Short History of a Revolutionary Idea. New York: Modern Library. 2003.
  • Blumberg, Phillip I., The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993)
  • John William Cadman, The Corporation in New Jersey: Business and Politics, , (1949)
  • C. A. Cooke, Corporation, Trust and Company: A Legal History, (1950)
  • John P. Davis, Corporations (1904)
  • Joseph S. Davis, Essays in the Earlier History of American Corporations (1917)
  • A.B. DuBois, The English Business Company after the Bubble Act, , (1938)
  • Edwin Merrick Dodd, American Business Corporations until 1860, With Special Reference to Massachusetts, (1954)
  • Charles Freedman, Joint-stock Enterprise in France, : From Privileged Company to Modern Corporation (1979)
  • Ernst Freund, The Legal Nature of the Corporation, (1897)
  • Frederick Hallis, Corporate Personality: A Study in Jurisprudence (1930)
  • Bishop Hunt, The Development of the Business Corporation in England (1936)
  • Ramesh Chandra Majumdar, Corporate Life in Ancient India, (1920)
  • Robert Charles Means, Underdevelopment and the Development of Law: Corporations and Corporation Law in Nineteenth-century Colombia, (1980)
  • Thomas Owen, The Corporation under Russian Law, : A Study in Tsarist Economic Policy (1991)
  • Radhe Shyam Rungta, The Rise of the Business Corporation in India, 1851–1900, (1970)
  • W. R. Scott, Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720 (1912)
  • Bruce Brown, The History of the Corporation (2003)

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Further reading

  • Barnet, Richard; Ronald E. Muller (1974). Global Reach: The Power of the Multinational Corporation. New York, NY: Simon & Schuster. 

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External links




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