Artificial entities that are created by state statute, and that are treated much like individuals under the law, having legally enforceable rights, the ability to acquire debt and to pay out profits, the ability to hold and transfer property, the ability to enter into contracts, the requirement to pay taxes, and the ability to sue and be sued.
The rights and responsibilities of a corporation are independent and distinct from the people who own or invest in them. A corporation simply provides a way for individuals to run a business and to share in profits and losses.
The concept of a corporate personality traces its roots to roman law and found its way to the American colonies through the British. After gaining independence, the states, not the federal government, assumed authority over corporations.
Although corporations initially served only limited purposes, the Industrial Revolution spurred their development. The corporation became the ideal way to run a large enterprise, combining centralized control and direction with moderate investments by a potentially unlimited number of people.
The corporation today remains the most common form of business organization because, theoretically, a corporation can exist forever and because a corporation, not its owners or investors, is liable for its contracts. But these benefits do not come free. A corporation must follow many formalities, is subject to publicity, and is governed by state and federal regulations.
Many states have drafted their statutes governing corporations based upon the Model Business Corporation Act. This document, prepared by the American Bar Association Section of Business Law, Committee on Corporate Laws, and approved by the american law institute, provides a framework for all aspects of corporate governance as well as other aspects of corporations. Like other model acts, the Model Business Corporation Act is not necessarily designed to be adopted wholesale by the various states, but rather is designed to provide guidance to states when they adopt their own acts.
Types of Corporations
Corporations can be private, nonprofit, municipal, or quasi-public. Private corporations are in business to make money, whereas nonprofit corporations generally are designed to benefit the general public. Municipal corporations are typically cities and towns that help the state to function at the local level. Quasi-public corporations would be considered private, but their business serves the public's needs, such as by offering utilities or telephone service.
There are two types of private corporations. One is the public corporation, which has a large number of investors, called shareholders. Corporations that trade their shares, or investment stakes, on securities exchanges or that regularly publish share prices are typical publicly held corporations.
The other type of private corporation is the closely held corporation. Closely held corporations have relatively few shareholders (usually 15 to 35 or fewer), often all in a single family; little or no outside market exists for sale of the shares; all or most of the shareholders help run the business; and the sale or transfer of shares is restricted. The vast majority of corporations are closely held.
Getting a Corporation Started
Many corporations get their start through the efforts of a person called a promoter, who goes about developing and organizing a business venture. A promoter's efforts typically involve arranging the needed capital, or financing, using loans, money from investors, or the promoter's own money; assembling the people and assets (such as land, buildings, and leases) necessary to run the corporation; and fulfilling the legal requirements for forming the corporation.
A corporation cannot be automatically liable for obligations that a promoter incurred on its behalf. Technically, a corporation does not exist during a promoter's pre-incorporation activities. A promoter therefore cannot serve as a legal agent, who could bind a corporation to a contract. After formation, a corporation must somehow assent before it can be bound by an obligation that a promoter has made on its behalf. Usually, if a corporation gets the benefits of a promoter's contract, it will be treated as though it has assented to, and accepted, the contract.
The first question facing incorporators (those forming a corporation) is where to incorporate. The answer often depends on the type of corporation. Theoretically, both closely held and large public corporations may incorporate in any state. Small businesses operating in a single state usually incorporate in that state. Most large corporations select Delaware as their state of incorporation because of its sophistication in dealing with corporation law.
Incorporators then must follow the mechanics that are set forth in the state's statutes. Corporation statutes vary from state to state, but most require basically the same essentials in forming a corporation. Every statute requires incorporators to file a document, usually called the articles of incorporation, and pay a filing fee to the secretary of state's office, which reviews the filing. If the filing receives approval, the corporation is considered to have started existing on the date of the first filing.
The articles of incorporation typically must contain (1) the name of the corporation, which often must include an element like Company, Corporation, Incorporated, or Limited," and may not resemble too closely the names of other corporations in the state; (2) the length of time the corporation will exist, which can be perpetual or renewable; (3) the corporation's purpose, usually described as "any lawful business purpose"; (4) the number and types of shares that the corporation may issue and the rights and preferences of those shares; (5) the address of the corporation's registered office, which need not be the corporation's business office, and the registered agent at that office who can accept legal service of process; (6) the number of directors and the names and addresses of the first directors; and (7) each incorporator's name and address.
Delaware: The Mighty Mite of Corporations
Delaware may be among the United States' smallest states, but it is the biggest when it comes to corporations: more than a third of all corporations listed by the New York Stock Exchange are incorporated in Delaware.
Delaware's allure is explained through a combination of history and law. Although today the state's corporations law is not necessarily less restrictive and less rigid than other states' corporation laws, Delaware could boast more corporation friendly statutes before model corporation laws came into vogue. As a result, corporate lawyers nationwide are more familiar with Delaware's law, and its statutes and case law provide certainty and easy access.
Delaware, more than any other state, relies on franchise tax revenues; thus, Delaware, more than any other state, is committed to remaining a responsive and desirable incorporation site. In addition, Delaware offers a level of certainty and stability: the state's constitution requires a two-thirds vote of both legislative houses to change its corporations statutes.
Delaware also has a specialized court that is staffed by lawyers from the corporate bar, and its highest court has similar expertise. Lawyers in the state continually work to keep Delaware's corporate law current, effective, and flexible. All combine to make Delaware the first state for incorporation.
A corporation's bylaws usually contain the rules for the actual running of the corporation. Bylaws normally are not filed with the secretary of state and are easier to amend than are the articles of incorporation. The bylaws should be complete enough so that corporate officers can rely on them to manage the corporation's affairs. The bylaws regulate the conduct of directors,
officers, and shareholders and set forth rules governing internal affairs. They can include definitions of management's duties, as well as times, locations, and voting procedures for meetings that affect the corporation.
People Behind a Corporation: Rights and Responsibilities
The primary players in a corporation are the shareholders, directors, and officers. Shareholders are the investors in, and owners of, a corporation. They elect, and sometimes remove, the directors, and occasionally they must vote on specific corporate transactions or operations. The board of directors is the top governing body. Directors establish corporate policy and hire officers, to whom they usually delegate their obligations to administer and manage the corporation's affairs. Officers run the day-to-day business affairs and carry out the policies the directors establish.
Shareholders Shareholders' financial interests in the corporation is determined by the percentage of the total outstanding shares of stock that they own. Along with their financial stakes, shareholders generally receive a number of rights, all designed to protect their investments. Foremost among these rights is the power to vote. Shareholders vote to elect and remove directors, to change or add to the bylaws, to ratify (i.e., approve after the fact) directors' actions where the bylaws require shareholder approval, and to accept or reject changes that are not part of the regular course of business, such as mergers or dissolution. This power to vote, although limited, gives the shareholders some role in running a corporation.
Shareholders typically exercise their voting rights at annual or special meetings. Most statutes provide for an annual meeting, with requirements for some advance notice, and any shareholder can get a court order to hold an annual meeting when one has not been held within a specified period of time. Although the main purpose of the annual meeting is to elect directors, the meeting may address any relevant matter, even one that has not been mentioned specifically in the advance notice. Almost all states allow shareholders to conduct business by unanimous written consent, without a meeting.
Shareholders elect directors each year at the annual meeting. Most statutes provide that directors be elected by a majority of the voting shares that are present at the meeting. The same number of shares needed to elect a director normally is required to remove a director, usually without proof of cause, such as fraud or abuse of authority.
A special meeting is any meeting other than an annual meeting. The bylaws govern the persons who may call a special meeting; typically, the directors, certain officers, or the holders of a specified percentage of outstanding shares may do so. The only subjects that a special meeting may address are those that are specifically listed in an advance notice.
Statutes require that a quorum exist at any corporation meeting. A quorum exists when a specified number of a corporation's outstanding shares are represented. Statutes determine what level of representation constitutes a quorum; most require one-third. Once a quorum exists, most statutes require an affirmative vote of the majority of the shares present before a vote can bind a corporation. Generally, once a quorum is present, it continues, and the withdrawal of a faction of voters does not prevent the others from acting.
A corporation determines who may vote based on its records. Corporations issue share certificates in the name of a person, who becomes the record owner (i.e., the owner according to company records) and is treated as the sole owner of the shares. The company records of these transactions are called stocktransfer books or share registers. A shareholder who does not receive a new certificate is called the beneficial owner and cannot vote, but the beneficial owner is the real owner and can compel the record owner to act as the beneficial owner desires.
Those who hold shares by a specified date before a meeting, called the record date, may vote at the meeting. Before each meeting, a corporation must prepare a list of shareholders who are eligible to vote, and each shareholder has an unqualified right to inspect this voting list.
Shareholders typically have two ways of voting: straight voting or cumulative voting. Under straight voting, a shareholder may vote his or her shares once for each position on the board. For example, if a shareholder owns 50 shares and there are three director positions, the shareholder may cast 50 votes for each position. Under cumulative voting, the same shareholder has the option of casting all 150 votes for a single candidate. Cumulative voting increases the participation of minority shareholders by boosting the power of their votes.
Shareholders also may vote as a group or block. A shareholder voting agreement is a contract among a group of shareholders to vote in a specified manner on certain issues; this is also called a pooling agreement. Such an agreement is designed to maintain control or to maximize voting power. Another arrangement is a voting trust. This has the same objectives as a pooling agreement, but in a voting trust, shareholders assign their voting rights to a trustee who votes on behalf of all the shares in the trust.
Shareholders need not attend meetings in order to vote; they may authorize a person, called a proxy, to vote their shares. Proxy appointment often is solicited by parties who are interested in gaining control of the board of directors or in passing a particular proposal; their request is called a proxy solicitation. Proxy appointment must be in writing. It usually may last no longer than a year, and it can be revoked.
Federal law generates most proxy regulation, and the Securities and Exchange Commission (SEC) has comprehensive and detailed regulations. These rules define the form of proxy-solicitation documents and require the distribution of substantial information about director candidates and other issues that are up for shareholder vote. Not all corporations are subject to federal proxy law; generally, the law covers only large corporations with many shareholders and with shares that are traded on a national securities exchange. These regulations aim to protect investors from promiscuous proxy solicitation by irresponsible outsiders who seek to gain control of a corporation, and from unscrupulous officers who seek to retain control of management by hiding or distorting facts.
In addition to voting rights, shareholders also have a right to inspect a corporation's books and records. A corporation almost always views the invocation of this right as hostile. Shareholders may only inspect records if they do so for a "proper purpose"; that is, is a purpose that is reasonably relevant to the shareholder's financial interest, such as determining the worth of his or her holdings. Shareholders can be required to own a specified amount of shares or to have held the shares for a specified period of time before inspection is allowed. Shareholders generally may review all relevant records that are needed, in order to gather information in which they have a legitimate interest. Shareholders also may examine a corporation's record of shareholders, including names and addresses and classes of shares.
Directors Statutes contemplate that a corporation's business and affairs will be managed by the board of directors or under the board's authority or direction. Directors often delegate to corporate officers their authority to formulate policy and to manage the business. In closely held corporations, directors normally involve themselves more in management than do their counterparts in large corporations. Statutes empower directors to decide whether to declare dividends; to formulate proposed important corporate changes, such as mergers or amendments to the articles of incorporation; and to submit proposed changes to shareholders. Many boards appoint committees to handle technical matters, such as litigation, but the board itself must address important matters. Directors customarily are paid a salary and often receive incentive plans that can supplement that salary.
A corporation's articles or bylaws typically control the number of directors, the terms of the directors' service, and the directors' ability to change their number and terms. The shareholders' power of removal functions as a check on directors who may wish to act in a way that is contrary to the majority shareholders' wishes. The directors' own fiduciary duties, or obligations to act for the benefit of the corporation, also serve as checks on directors.
The bylaws usually regulate the frequency of regular board meetings. Directors also may hold special board meetings, which are any meetings other than regular board meetings. Special meetings require some advance notice, but the agenda of special directors' meetings is not limited to what is set forth in the notice, as it is with shareholders' special meetings. In most states, directors may hold board meetings by phone and may act by unanimous written consent without a meeting.
A quorum for board meetings usually exists if a majority of the directors in office immediately before the meeting are present. The quorum number may be increased or decreased by amending the bylaws, although it may not be decreased below any statutory minimum. A quorum must be present for directors to act, except when the board is filling a vacancy. Most statutes allow either the board itself or shareholders to fill vacancies.
Directors' fiduciary duties fall under three broad categories: the duty of care, the duty of loyalty, and duties imposed by statute. Generally, a fiduciary duty is the duty to act for the benefit of another—here, the corporation—while subordinating personal interests. A fiduciary occupies a position of trust for another and owes the other a high degree of fidelity and loyalty.
A director owes the corporation the duty to manage the entity's business with due care. Statutes typically define using due care as acting in good faith, using the care that an ordinarily prudent person would use in a similar position and situation, and acting in a manner that the director reasonably thinks is in the corporation's best interests. Courts seldom second-guess directors, but they usually find personal liability for corporate losses where there is self-dealing or negligence.
Self-dealing transactions raise questions about directors' duty of loyalty. A self-dealing transaction occurs when a director is on both sides of the same transaction, representing both the corporation and another person or entity who is involved in the transaction. Self-dealing may endanger a corporation because the corporation may be treated unfairly. If a transaction is questioned, the director bears the burden of proving that it was in fact satisfactory.
Self-dealing usually occurs in one of four types of situations: transactions between a director and the corporation; transactions between corporations where the same director serves on both corporations' boards; by a director who takes advantage of an opportunity for business that arguably may belong to the corporation; and by a director who competes with the corporation.
The usurping of a corporate opportunity poses the most significant challenge to a director's duty of loyalty. A director cannot exploit the position of director by taking for himself or herself a business opportunity that rightly belongs to the corporation. Most courts facing this question compare how closely related the opportunity is to the corporation's current or potential business. Part of this analysis involves assessing the fairness of taking the opportunity. Simply taking a corporation's opportunity does not automatically violate the duty of loyalty. A corporation may relinquish the opportunity, or the corporation may be incapable of taking the opportunity for itself.
Directors who are charged with violating their duty of care usually are protected by what courts call the business judgment rule. Essentially, the rule states that even if the directors' decisions turn out badly for the corporation, the directors themselves will not be personally liable for losses if those decisions were based on reasonable information and if the directors acted rationally. Unless the directors commit fraud, a breach of good faith, or an illegal act, courts presume that their judgment was formed to promote the best interests of the corporation. In other words, courts focus on the process of reaching a decision, not on the decision itself, and require directors to make informed, not passive, decisions.
State statutes often impose additional duties and liabilities on directors as fiduciaries to a corporation. These laws may govern conduct such as paying dividends when a statute or the articles prohibit doing so; buying shares when a statute or the articles prohibit doing so; giving assets to shareholders during liquidation without resolving a corporation's debts, liabilities, or obligations; and making a prohibited loan to another director, an officer, or a shareholder.
If a court finds that a director has violated a duty, the director still might not face personal liability. Some statutes require or permit corporations to indemnify a director who violated a duty but acted in good faith, who received no improper personal benefit, and who reasonably thought that the action was lawful and in the corporation's best interests. Indemnification means that the corporation reimburses the director for expenses incurred defending himself or herself and for amounts he or she paid after losing or settling a claim.
Officers The duties and powers of corporate officers can be found in statutes, articles of incorporation, bylaws, or corporate resolutions. Some statutes require a corporation to have specific officers; others merely require that the bylaws contain a description of the officers. Officers usually serve at the will of those who appointed them, and they generally can be fired with or without cause, although some officers sign employment contracts.
Corporations typically have as officers a president, one or more vice presidents, a secretary, and a treasurer. The president is the primary officer and supervises the corporation's business affairs. This officer sometimes is referred to as the chief executive officer, but the ultimate authority lies with the directors. The vice president fills in for the president when the latter cannot or will not act. The secretary keeps minutes of meetings, oversees notices, and manages the corporation's records. The treasurer manages and is responsible for the corporation's finances.
Officers act as a corporation's agents and can bind the corporation to contracts and agreements. Many parties who deal with corporations require that the board pass a resolution approving any contract negotiated by an officer, as a sure way to bind the corporation to the contract. In the absence of a specific resolution, the corporation still may be bound if it ratified the contract by accepting its benefits or if the officer appeared to have the authority to bind the corporation. Courts treat corporations as having knowledge of information if a corporate officer or employee has that knowledge.
Like directors, officers owe fiduciary duties to the corporation: good faith, diligence, and a high degree of honesty. But most litigation about fiduciary duties involves directors, not officers.
An officer does not face personal liability for a transaction if he or she merely acts as the corporation's agent. Nevertheless, the officer may be personally liable for a transaction where the officer intends to be bound personally or creates the impression that he or she will be so bound; where the officer exceeds his or her authority; and where a statute imposes liability on the officer, such as for failure to pay taxes.
Shares A corporation divides its ownership units into shares, and can issue more than one type or class of shares. The articles of incorporation must state the type or types and the number of shares that can be issued. A corporation may offer additional shares once it has begun operating, sometimes subject to current shareholders' preemptive rights to buy new shares in proportion to their current ownership.
Directors usually determine the price of shares. Some states require corporations to assign a nominal or minimum value to shares, called a par value, although many states are eliminating this practice. Many states allow some types of non-cash property to be exchanged for shares. Corporations also raise money through debt financing—also called debt securities—which gives the creditor an interest in the corporation that ultimately must be paid back by the corporation, much like a loan.
If a corporation issues only one type of share, its shares are called common stock or common shares. Holders of common stock typically have the power to vote and a right to their share of the corporation's net assets. Statutes allow corporations to create different classes of common stock, with varying voting power and dividend rights.
A corporation also may issue preferred shares. These are typically nonvoting shares, and their holders receive a preference over holders of common shares for payment of dividends or liquidations. Some preferred dividends may be carried over into another year, either in whole or in part.
Dividends A dividend is a payment to shareholders, in proportion to their holdings, of current or past earnings or profits, usually on a regular and periodic basis. Directors determine whether to issue dividends. A dividend can take the form of cash, property, or additional shares. Shareholders have the right to force payment of a dividend, but they usually succeed only if the directors abused their discretion.
Restrictions on the distribution of dividends can be found in the articles of incorporation and in statutes, which seek to ensure that the dividends come out of current and past earnings. Directors who vote for illegal dividends can be held personally liable to the corporation. In addition, a corporation's creditors often will contractually restrict the corporation's power to make distributions.
Piercing the Corporate Veil
When a corporation is a sham, engages in fraud or other wrongful acts, or is used solely for the personal benefit of its directors, officers, or shareholders, courts may disregard the separate corporate existence and impose personal liability on the directors, officers, or shareholders. In other words, courts may pierce the "veil" that the law uses to divide the corporation (and its liabilities and assets) from the people behind the corporation. The veil creates a separate, legally recognized corporate entity and shields the people behind the corporation from personal liability.
In these cases, courts look beyond the form to the substance of the corporation's actions. The facts of a particular case must show some misuse of the corporate privilege or show a reason to cut back or limit the corporate privilege to prevent fraud, misrepresentation, or illegality or to achieve equity or fairness.
Courts traditionally require fraud, illegality, or misrepresentation before they will pierce the corporate veil. Courts also may ignore the corporate existence where the controlling shareholder or shareholders use the corporation as merely their instrumentality or alter ego, where the corporation is undercapitalized, and where the corporation ignores the formalities required by law or commingles its assets with those of a controlling shareholder or shareholders. In addition, courts may refuse to recognize a separate corporate existence when doing so would violate a clearly defined statutory policy.
Courts may pierce the corporate veil in taxation or bankruptcy cases, in addition to cases involving plaintiffs with contract or tort claims. Federal law in this area is usually similar to state law.
The instrumentality and alter ego doctrines used by courts are practically indistinguishable. Courts following the instrumentality doctrine concentrate on finding three factors: (1) the people behind the corporation dominate the corporation's finances and business practices so much that the corporate entity has no separate will or existence; (2) the control has resulted in a fraud or wrong, or a dishonest or unjust act; and (3) the control and harm directly caused the plaintiff's injury or unjust loss.
The alter ego doctrine allows courts to pierce the corporate veil when two factors exist: (1) the shareholder or shareholders disregard the separate corporate entity and use the corporation as a tool for personal business, merging their separate entities with that of the corporation and making the corporation merely their alter ego; and (2) recognizing the corporation and shareholders as separate entities would give court approval to fraud or cause an unfair result.
It may appear that a corporation owned by one or two persons or a single family would almost automatically lose its separate legal existence under these doctrines, but this is not necessarily so. A sole owner of a business, for example, can incorporate herself or himself, or the business; issue all shares to herself or himself; and set up dummy directors to follow the necessary corporate formalities. However, the sole shareholder may lose the protection of limited liability—just as any other corporation would—if the corporate affairs and assets are confused or commingled with personal affairs and assets, if the sole shareholder abuses her or his control, or if the sole shareholder ignores the necessary corporate formalities.
When courts ponder piercing the corporate veil, they consider undercapitalization to exist when a corporation's assets or the value it receives for issuing shares or bonds is disproportionately small considering the nature of the business and the risks of engaging in that business. Courts assess undercapitalization by examining the capitalization at the time the corporation was formed or entered a new business. For example, if a corporation that faces or may face obligations to creditors and potential lawsuits has received only a token or minimal amount for its shares, or has siphoned off its assets through dividends or salaries, courts may find undercapitalization. Such corporations are called shells or shams designed to take advantage of limited liability protections while not exposing to a risk of loss any of the profits or assets they gained by incorporating.
The undercapitalization doctrine especially comes into play when courts must determine who should bear a loss—a corporation's shareholders or a third person. This determination usually depends on whether the claim involves a contract or a tort (civil wrong or injury). In contract cases, the third party usually has had some earlier dealings with the corporation and should know that the corporation is a shell. So, unless there has been deception, courts typically find that the third party assumes the risk and should suffer the loss. In tort cases, the third party normally has not dealt voluntarily with the corporation. Courts thus must decide whether the owners of the business can shift the risk of loss or injury off themselves and onto the innocent general public simply by creating a marginally financed corporation to conduct their business.
Courts may disregard the separate corporate existence when a corporation fails to follow the formalities required by corporation statutes. Courts often cite the lack of corporate formalities in finding that a corporation has become the alter ego or instrumentality of the controlling shareholder or shareholders. For example, a court may justify piercing the corporate veil if a corporation began to conduct business before its incorporation was completed; failed to hold shareholders' and directors' meetings; failed to file an annual report or tax return; or directed the corporation's business receipts straight to the controlling shareholder's or shareholders' personal accounts.
Courts also may ignore the corporate existence when a corporation's funds or assets are commingled with the controlling shareholder's or shareholders' funds or assets. For example, they may pierce the corporate veil when no sharp distinction is drawn between corporate and personal property; corporate money has been used to pay personal debts without the appropriate accounting, and vice versa; the controlling shareholder's or shareholders' personal assets have been depreciated along with corporate assets; or the controlling shareholder or shareholders have endorsed company checks in their own name.
Many times, a controlling shareholder is itself a corporation: the controlling shareholder is the parent corporation, and the controlled corporation is a subsidiary. In some circumstances courts may pierce the corporate veil protecting the parent and hold the parent liable for the subsidiary's obligations. This happens where the subsidiary loses its independent existence because the parent dominates the subsidiary's affairs by participating in day-to-day operations, resolving important policy decisions, making business decisions without consulting the subsidiary's directors or officers, and issuing instructions directly to the subsidiary's employees or instructing its own employees to conduct the subsidiary's business.
Courts also hold the parent liable where the parent runs the subsidiary in an unfair manner by allocating profits to the parent and losses to the subsidiary; the parent represents the subsidiary as a division or branch rather than as a subsidiary; the subsidiary does not follow its own corporate formalities; or the parent and subsidiary are engaged in essentially the same business, and the subsidiary is undercapitalized.
A final scenario in which courts may pierce the corporate veil involves an enterprise entity, which is a single business enterprise divided into separate corporations. For example, a taxicab enterprise may consist of five corporations with two taxis each, a corporation for the dispatching unit, and a corporation for the parking garage. All the corporations, though separate, essentially engage in a single business—providing taxi service.
Courts often harbor suspicions that such arrangements are made in an attempt to minimize each corporation's assets that would be subject to claims by creditors or injured persons. Courts often will, in essence, put the corporations together as a single entity and make that entity liable to a creditor or injured person, perhaps because treating them as separate entities is unfair to those who believe they really form a single unit.
Bainbridge, Stephen M. 2001. "Abolishing Veil Piercing." The Journal of Corporation Law 26 (spring): 479–535.
Huss, Rebecca J. 2001. "Revamping Veil Piercing for All Limited Liability Entities: Forcing the Common Law Doctrine into the Statutory Age." University of Cincinnati Law Review 70 (fall): 93–135.
Roche, Vincent M. 2003. "Bashing the Corporate Shield: The Untenable Evisceration of Freedom of Contract in the Corporate Context." The Journal of Corporation Law 28 (winter): 289–312.
Changes and Challenges Faced by Corporations
Amendments The most straightforward and common changes faced by corporations are amendments to their bylaws and articles. The directors or incorporators initially adopt the bylaws. After that, the shareholders or directors, or both, hold the power to repeal or amend the bylaws, usually at shareholders' meetings and subject to a corporation's voting regulations. Those who hold this power can adopt or change quorum requirements; prescribe procedures for the removal or replacement of directors; or fix the qualifications, terms, and numbers of directors. Most modern statutes limit the authority to amend articles only by requiring that an amend ment would have been legal to include in the original articles. Some statutes shield minority shareholders from harmful majority-approved amendments.
Mergers and Acquisitions A merger or acquisition generally is a transaction or device that allows one corporation to merge into or to take over another corporation. mergers and acquisitions are complicated processes that require the involvement and approval of the directors and the shareholders.
In a merger or consolidation, two corporations become one by either maintaining one of the original corporations or creating a new corporation consisting of the prior corporations. Where statutes authorize these combinations, these changes are called statutory mergers. The statutes allow the surviving or new corporation to automatically assume ownership of the assets and liabilities of the disappearing corporation or corporations.
Statutes protect shareholder interests during mergers, and state courts assess these combinations using the fiduciary principles that are applied in self-dealing transactions. Most statutes require a majority of the shareholders in order to approve a merger; some require two-thirds. Statutes also allow shareholders to dissent from such transactions, to have a court appraise the value of their stake, and to force payment at a judicially determined price.
Mergers can involve sophisticated transactions that are designed simply to combine corporations or to create a new corporation or to eliminate minority shareholder interests. In some mergers, an acquiring corporation creates a subsidiary as the form for the merged or acquired entity. A subsidiary is a corporation that is majority-owned or wholly owned by another corporation. Creating a subsidiary allows an acquiring corporation to avoid responsibility for an acquired corporation's liabilities, while providing shareholders in the acquired corporation with an interest in the acquiring corporation.
Mergers also can involve parent corporations and their subsidiaries. A similar, though distinct, transaction is the sale, lease, or exchange of all or practically all of a corporation's property and assets. The purchaser in such a transaction typically continues operating the business, although its scope may be narrowed or broadened. In most states, shareholders have a statutory right of dissent and appraisal in these transactions, unless the sale is part of ordinary business dealings, such as issuing a mortgage or deed of trust covering all of a corporation's assets.
Not all business combinations are consensual. Often, an aggressor corporation will use takeover techniques to acquire a target corporation. Aggressor corporations primarily use the cash tender offer in a takeover: The aggressor attempts to persuade the target corporation's shareholders to sell, or tender, their shares at a price that the aggressor will pay in cash. The aggressor sets the purchase price above the current market price, usually 25 to 50 percent higher, to make the offer attractive. This practice often requires the aggressor to assume significant debts in the takeover, and these debts often are paid for by selling off parts of the target corporation's business.
Restraints and protections exist for these situations. In takeovers of registered or large, publicly held corporations, federal law requires the disclosure of certain information, such as the source of the money in the tender offer. In smaller corporations, a controlling shareholder, who holds a majority of a corporation's shares, may not transfer control to someone outside the corporation without a reasonable investigation of the potential buyer. A controlling shareholder also may not transfer control where there is a suspicion that the buyer will use the corporation's assets to pay the purchase price or otherwise wrongfully take the corporation's assets.
Corporations can employ defensive tactics to fend off a takeover. They can find a more compatible buyer (a "white knight"); issue additional shares to make the takeover less attractive (a "lock-up"); create new classes of stock whose rights increase if any person obtains more than a prescribed percentage (a "poison pill"); or boost share prices to make the takeover price less appealing.
Dissolution A corporation can terminate its legal existence by engaging in the dissolution process. Most statutes allow corporations to dissolve before they begin to operate as well as after they get started. The normal process requires the directors to adopt a resolution for dissolution, and the shareholders to approve it, by either a simple majority or, in some states, a two-thirds majority. After approval, the corporation engages in a "winding-up" period, during which it fulfills its obligations for taxes and debts, before making final, liquidation distributions to shareholders.
Derivative Suits Shareholders can bring suit on behalf of a corporation to enforce a right or to remedy a wrong that has been done to the corporation. Shareholders "derive" their right to bring suit from a corporation's right. One common claim in a derivative suit would allege misappropriation of corporate assets or other breaches of duty by the directors or officers. Shareholders most often bring derivative suits in federal courts.
Shareholders must maneuver through several procedural hoops before actually filing suit. Many statutes require them to put up security, often in the form of a bond, for the corporation's expenses and attorneys' fees from the suit, to be paid if the suit fails; this requirement often kills a suit before it even begins. The shareholders must have held stock at the time of the contested action and must have owned it continuously ever since. The shareholders first must demand that the directors enforce the right or remedy the wrong; if they fail to make a demand, they must offer sufficient proof of the futility of such a demand. Normally, a committee formed by the directors handles—and dismisses—the demand, and informed decisions are protected by the business judgment rule.
Proxy Contests A proxy contest is a struggle for control of a public corporation. In a typical proxy contest, a nonmanagement group vies with management to gain enough proxy votes to elect a majority of the board and to gain control of the corporation. A proxy contest may be a part of a takeover attempt.
Management holds most of the cards in such disputes: It has the current list of shareholders; shareholders normally are biased in its favor; and the nonmanagement group must finance its part of the proxy contest, but if management acts in good faith, it can use corporate money for its solicitation of proxy votes. In proxy contests over large, publicly held corporations, federal regulations prohibit, among other things, false or misleading statements in solicitations for proxy votes.
Insider Trading Federal, and often state, laws prohibit a corporate insider from using nonpublic information to buy or sell stock. Most cases involving violations of these laws are brought before federal courts because the federal law governing this conduct is extensive. The federal law, which is essentially an antifraud statute, states that anyone who knowingly or recklessly misrepresents, omits, or fails to correct a material or important fact that causes reliance in a sale or purchase, is liable to the buyer or seller. Those with inside information must either disclose the information or abstain from buying or selling.
Corporations do not represent the only, or necessarily the best, type of business. Several other forms of business offer varying degrees of organizational, financial, and tax benefits and drawbacks. The selection of a particular form depends upon the investors' or owners' objectives and preferences, and upon the type of business to be conducted.
A partnership is the simplest business organization involving more than one person. It is an association of two or more people to carry on business as co-owners, with shared rights to manage and to gain profits and with shared personal liability for business debts. A sole proprietorship is more or less a one-person partnership. It is a business owned by one person, who alone manages its operation and takes its profits and is personally liable for all of its debts. A limited partnership is a partnership with two or more general partners, who manage the business and have personal and unlimited liability for its debts, and one or more limited partners, who have almost no management powers and whose liability is limited to the amount of their investment. In a limited liability company, the limited liability of a limited partnership is combined with the tax treatment of a partnership, and all partners have limited liability and the authority to manage. This is a relatively new business form.
A corporation thus provides limited liability for shareholders, unlike a partnership, a sole proprietorship, or a limited partnership, each of which exposes owners to unlimited liability. A corporation is taxed like a separate entity on earnings, out of which the corporation pays dividends, which are then taxed (again) to the shareholders; this is considered double taxation. Partnerships and limited partnerships are not taxed as separate entities, and income or losses are allocated to the partners, who are directly taxed; this "flow-through" or "pass-through" taxation allocates income or losses only once. Corporations centralize management in the directors and officers, whereas partnerships divide management among all partners or general partners. Corporations can continue indefinitely despite the death or withdrawal of a shareholder; partnerships and limited partnerships, however, dissolve with the death or withdrawal of a partner. Shareholders in a publicly held corporation generally can sell or transfer their stock without limitation. Holders of interest in a partnership or limited partnership, however, can convey their interest only if the other partners approve. Corporations must abide by significant formalities and must cope with a great volume of paperwork; partnerships and limited partnerships face few formalities and few limitations in operating their business.
New Issues Faced by Corporations
Corporations in the United States have suffered a series of major fiascos in recent years that have cost investors and employees billions of dollars and have eroded public confidence in the governance of major corporations. During the mid to late 1990s, the U.S. economy grew in record numbers, much to the delight of investors and the public in general. Adding to this elation
was the success of Internet-based companies, known generally as "dot-coms." Business commentators and the general press referred to this collective success as the "dot-com bubble."
The "bubble" burst during the early part of 2000. Marketing analysts in 1999 predicted that the enormous flow of capital, coupled with a limited range of business models that tended to copy from one another, would lead to a severe downturn or shakedown. Early in 2000, stock in several of these companies sank rapidly, leading to hundreds of bankruptcy filings and thousands of employees losing their jobs. Although not all of the companies shut down, entrepreneurs and investors have been weary to follow this model since the collapse.
Confidence in American corporations decreased further with a series of corporate failure based largely upon mismanagement by directors and officers. In 2001, Enron Corporation, a large energy, commodities, and service company, suffered an enormous collapse that led to the largest bankruptcy in U.S. history. Many of the company's employees lost their 401(k) retirements plans that held company stock. The controversy also extended to the company's auditor, Arthur Andersen, L.L.P., which was accused of destroying thousands of Enron documents.
Enron reported annual revenues of $101 billion in 2000, but stock prices began to fall throughout 2001. In the third quarter of 2001 alone, Enron reported losses of $638 million, leading to an announcement that the company was reducing shareholder equity by $1.2 billion. The SEC began an inquiry into possible conflicts of interest within the company regarding outside partnerships. The SEC investigation became formal in October 2001, and initial reports focused on problems with Enron's dealings with partnerships run by the company's chief financial offer.
Many additional allegations continued to surface throughout November 2001, including rumors suggesting that company officials sought the assistance of top-level White House officials, including Treasury Secretary Paul O'Neill. In December 2001, Enron's stock prices fell below $1 per share in the largest single-day trading volume on either the New York Stock Exchange or the NASDAQ. Because the company's employees' 401(k) plans were tied into company stock, these employees lost their retirement plans.
Concerns over corporate governance continued to dominate business news in 2002, as WorldCom, Inc., the second-largest long-distance provider in the United States, filed for bankruptcy. Like Enron employees, WorldCom's employee 401(k) plans held company stock, and by 2003, the value of these plans had decreased by 98 percent from their value in 1999. Moreover, similar to the Enron fiasco, many allegations focused upon the accounting methods that WorldCom's accountants employed. The company's board of directors and chief executive officer expressed "shock" that the company had misstated $38 billion in capital expenses and that the company may have lost money in 2001 and 2002 when, instead, it had claimed a profit.
The SEC has responded to these problems by requiring greater oversight of the accounting profession in the United States. New regulations have also modified the accounting methods that by these companies employed. Nevertheless, public confidence in U.S. corporations and the capital markets remains shaken, and much of the criticism has focused upon the lack of oversight regarding corporate directors and officers. Many have called for reforms that will hold these directors and officers responsible in instances of malfeasance.
Cox, James D., Thomas L. Hazen, and F. Hodge O'Neal. 1995. Corporations I, II, III. Boston: Little, Brown.
"Corporations." West's Encyclopedia of American Law. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/corporations
"Corporations." West's Encyclopedia of American Law. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/corporations
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American Psychological Association
The corporation, the central economic institution of modern society, is, in its most general definition, an association of individuals united for a common purpose and acting in a common name. With this definition, it is an institution of unknown antiquity. Certainly corporations organized for business and other purposes were well known to the Romans, but there is evidence that such institutions, intermediate between the individual and the state, are much older than this. Other characteristics that particularize the corporation as we know it have been present or absent throughout history, depending on the purposes of the association, the character of institutional innovation, and the permissiveness of the state.
The law is prone to emphasize that the corporation is a body chartered or recognized by the state; that it is a formal agreement, in the nature of a contract, among people joined in a common purpose; that it can hold property, contract, and sue and be sued in a common name; and that it has a length of life not subject to the lives of its members. These formal attributes, however, tend to compress the corporation as a historical and developing institution into too narrow a mold. Roman corporations were not chartered by the state before the third century a.d., and in seventeenthcentury Eng-land there were many associations doing business on a joint-stock basis that were not chartered by either Crown or Parliament. Indeed, alarm at the activities of these unchartered associations was an important reason for the Bubble Act of 1720.
The significance of the agreement of the several hundred thousand stockholders of a large American corporation and the commonness of their purpose is a matter of some doubt. The holding of property, contracting, and suing in a common name are highly significant attributes of the business corporation; but they may have little importance to an association incorporated for the improvement of the breed of Airedales. Even a life beyond the lives of its members is not a necessary attribute of the corporation as a historical entity.
Likewise, most of the elements that are emphasized as essential attributes of the modern business corporation are the product of social invention and have not been characteristic of business corporations from their beginning. Roman business corporations traded on a joint stock; but prior to the development of double-entry bookkeeping in the Italian city-states, the distinction between common and individual stocks tended to be somewhat fuzzy. The early English overseas trading companies also traded on a joint stock, but normally the capital was redistributed to the stockholders at the expiration of a voyage and reconstituted only for the next. The Dutch East India Company, founded in 1602, is supposed to be the first corporation established with a permanent capital stock. The practice of issuing transferable shares developed on the Continent and was brought to England in the sixteenth century. It was, and still is, the Continental practice to issue bearer shares, a device that has not been used in Anglo-Saxon jurisdictions. Limitation of the liability of stockholders for the debts of the corporation, characteristic of most modern business corporations, is a privilege that, on occasion, has been granted or withheld. In England it was not generally made available until 1855.
The delegation of authority to manage the corporation's daily affairs to a board of directors has developed slowly. This delegation is of no—or little —importance to the small, privately owned corporation and, in the large corporation, it has been subject to limitations that have varied considerably among countries and over time. The proliferation of participation rights in capital and income represented by different classes of securities is largely the product of American railway finance in the nineteenth century. And the various devices for assuring and perpetuating minority ownership or management control, such as voting trusts, nonvoting and multiple-voting stock, pyramiding via the holding company, and use of the proxy, are largely the invention of our own epoch.
In other words, the corporation is an evolving entity, and the end of its evolution is by no means in sight. There is every reason to believe that the business corporation a century hence will be a rather different institution from the one we now behold. The relations between the corporation and the state, between management and the various participants in capital and income, and between the corporation and its suppliers, customers, and labor force are in process of change.
If we consider the long sweep of corporate history, it is useful to distinguish the typical forms and uses of the corporation before and after the industrial revolution. Although the corporation was early put to business use, in the early period it was established predominantly for other purposes. Universities, monasteries, guilds, bishoprics, boroughs, were familiar types of corporations. Typically, the emphasis was on association for a common purpose rather than for utilization of a common stock of capital. The incorporators were a group of men related to each other by the place where they lived and the things they did. In the period since the industrial revolution, the business corporation has become the overwhelmingly important form. The emphasis has come to be placed on the management of a stock of capital rather than on the cooperation of a group of individuals. In the words of one observer, the “associative elements have been refined out” of the corporation, and in law it has become the expression “of a complicated relationship between men and things.”
In England the corporation was known as early as the Norman period; and from the fourteenth century on, incorporation by the Crown of boroughs, guilds, and ecclesiastical bodies was used as both an administrative device and a method of extending royal power against the baronage. Insofar as business activities were involved, the emphasis was not on a common stock, but rather on the regulation of the affairs of a group of craftsmen or tradesmen, each operating with his own capital. To this end the incorporated guilds developed effective internal legislative, judicial, and executive instrumentalities. More often than not, a functional or territorial monopoly was claimed for its membership.
The use of the corporation as both a business device and an arm of the state is clearly evidenced in the operations of the large overseas trading and colonizing companies of the sixteenth and seventeenth centuries. The British East India Company, the Levant Company, and others were as much governments as they were business enterprises. The American colonies were established by chartered corporations that governed as well as traded in their respective areas. Here again a grant of monopoly privileges was a common feature of incorporation. The colonists had every reason, from their experience, to associate monopoly with incorporation; and this view continued to influence American attitudes toward the corporation until well into the nineteenth century.
This customary relation between monopoly privilege and incorporation contributed in a major way to making the right of incorporation one of the issues in the struggle between Crown and Parliament in the seventeenth century. Parliament first sought the right to confirm such grants and later the independent power to grant charters. During the eighteenth century, corporations were chartered by both the Crown and Parliament; this issue was not finally settled until the enactment of general incorporation laws in the nineteenth century.
If we consider the transition from the older business or nonbusiness corporation to the modern, predominantly business corporation to be principally a shift from the emphasis on association, with all the problems of governance of men in association for a common purpose, to an emphasis on the administration of a joint stock of capital for profit, it is probable that the British joint-stock company is the closest forerunner of the modern business corporation. Before the industrial revolution, the sole proprietorship and partnership were overwhelmingly the most important types of business organization, both in numbers and in assets owned and controlled. But the seventeenth century witnessed an increasing number of business associations, both incorporated and unincorporated, trading on a common stock and acting in a common name. Participation in a joint stock recommended itself particularly as a device for spreading the risk in hazardous overseas trading operations. Before the end of the seventeenth century, many joint-stock companies had been formed in England for domestic operations as well.
Early in the eighteenth century, in both England and France, the formation of such companies assumed boom proportions. The two companies that achieved particular prominence in the ensuing debacle, the South Sea Company in England and John Law's Compagnie de la Louisiane ou d'Occident in France, were both chartered—the South Sea Company in 1711 and John Law's company in 1717. But in England, at least, many of the joint-stock companies that fell into disrepute were not chartered. The Bubble Act of 1720 struck directly at these unchartered companies, but its effects seriously inhibited the formation of chartered companies as well. This piece of legislation described itself as “An Act to Restrain the Extravagant and Unwarrantable Practice of Raising Money by Voluntary Subscriptions for Carrying on Projects Dangerous to the Trade and Subjects of this Kingdom.” It prohibited:
the acting or presuming to act as a corporate Body or Bodies, the raising or pretending to raise transferable Stock or Stocks, the transferring or pretending to transfer or assign any Share or Shares in Such Stock or Stocks without Legal Authority either by Act of Parliament or by any charter from the Crown to warrant such acting as a Body Corporate. … (quoted in Davis  1961, pp. iii-iv)
Although the Bubble Act left the door open for duly chartered corporations, very few business corporations were in fact chartered. During the eighteenth century the corporation was in eclipse. It was not that businessmen ceased to understand the merits of the corporation as a business form. Applications for the privilege of incorporation during the eighteenth century continued to stress the advantages of the holding of property in a common name; the legal right to contract, sue, and be sued; the effective delegation of power to a directorate; life extending beyond the lives of members; and limited liability. But the sentiments aroused by the crash of 1720 were deep and long-lasting. Adam Smith, writing on the eve of the industrial revolution, expressed these sentiments firmly. In his view, the joint-stock company, without monopoly privileges, was likely to be a successful enterprise only in conducting such routine operations as banking and insurance, or the management of canals and urban water systems.
Such enterprises usually required more capital than could be provided by a sole proprietor or a partnership. With the advent of the industrial revolution, the number of business opportunities that could be effectively exploited only by sizable amounts of capital increased rapidly. The joint-stock company was frequently the most effective way of assembling the required quantities of capital, and the management of such companies rather quickly demonstrated that the effectiveness of this type of business enterprise was not, in fact, limited to routine operations. With the industrial revolution the business corporation came into its own. Its subsequent development falls roughly into two periods. The first saw the spread of free incorporation under permissive general laws. The second has witnessed the growth of the large, multiplant corporation, frequently through the amalgamation of small local and regional concerns.
France took the leadership in liberalizing corporation laws. The Code de Commerce of 1807 recognized three classes of business associations, of which one—the société anonyme—was the business corporation with transferable shares. The formation of such companies required special government authorization until the law of 1867, which permitted corporations to be formed on the basis of public registration. In England the Bubble Act was repealed in 1825, but incorporation continued to be permitted only by special grant until 1844. Limited liability was not granted as a matter of course until 1855. In Germany freedom of incorporation was not established until 1870.
The terms used to characterize the business corporation in different countries emphasize different aspects of the institution. The German Gesellschaft mit beschränkter Haftung stresses limited liability. The French société anonyme suggests the juristic as against the real person—a “person” whose life is independent of the lives of the incorporators. The British “limited joint-stock company” emphasizes the common capital, with participating rights and limited obligations. The American “corporation” refers back to the older meaning of an association of individuals united for a common purpose.
In the American colonies the only business corporations important enough to justify the investment in royal charters were the colonies themselves. And the extension to the colonies of the principles of the Bubble Act in 1741 effectively precluded the formation of unincorporated joint-stock companies. Thus, the United States came into being with a population highly suspicious of the business corporation as an instrument of royal prerogative and royal favor. It was not long, however, before the business corporation was domesticated to the American environment. The state legislatures, conceived as heirs to the sovereign power, took it upon themselves to grant charters, and a sizable number of businesses were incorporated before the constitution was ratified. Despite the fact that a power of the federal government to incorporate was deliberately omitted from the constitution, Congress chartered a corporation as early as 1791; the Supreme Court, in McCulloch v. Maryland, ratified this use of power. Federal incorporation, however, has been relatively rare; and corporate policy very early in the nineteenth century became a prerogative of the several states.
Some 335 businesses had been incorporated in the United States by 1800, mainly banks, insurance companies, and canal, turnpike, and bridge companies. Although special charters were required, these were readily granted for almost any business purpose; in 1811 New York enacted the first law permitting extensive self-incorporation. This act covered the principal areas of domestic manufacture and permitted the self-incorporation of companies with an authorized capital of less than $100,000. Larger companies required special charters, and such charters continued to be sought even by a number of small companies. The Connecticut Act of 1837 was still more general, and before the beginning of the Civil War a dozen states had enacted general incorporation laws. Most of these states, however, still left the way open for special charters. In fact, the general laws tended to be relatively restrictive and limited to smaller companies. Larger companies frequently attained a substantially greater freedom of action by special legislative enactment.
Competition among the states for the business of incorporating led, after the Civil War, to a rather rapid relaxation of legislatively imposed limitations. This movement was favored by a business environment in which incorporation came to be regarded as a “right” rather than a “privilege”; a “right” that was conceived to be an essential element of the doctrine of individual liberty. The New Jersey Act of 1875, which was highly permissive, was perhaps the first of the modern incorporation laws; it was followed over the next two decades by similar laws in other states. This process led to a substantially more lax regulation of business corporations than characterized the company law of most European countries.
The large majority of business corporations formed in any economically advanced country are hardly to be distinguished from other types of business organization. They normally enjoy limited liability and a different tax status, but in essential respects function like other small firms. Economic theory has tended to see entrepreneurial activity as unaffected by the particular organizational form with which it happens to be clothed. But while the small, private corporation may be economically— and in other respects—undistinguishable from other types of firms, this is clearly not true of the large, quasi-public corporation. The large firm, because of its capital requirements, is almost inevitably a corporation; most of the problems commonly associated with corporate activity are problems of size and dispersion of ownership. The small, private corporation and the large, quasi-public corporation as legal persons may be equal in the eyes of the law, but they are so in no other respect.
The business area in which capital requirements first demanded the large corporate organization was railway transportation. Since individual fortunes were quite inadequate to meet these financial requirements, means were sought to enlist the savings of both public bodies and small private contributors. American railways were typically undercapitalized, and, in search of funds to meet underestimated financial requirements, a long series of financial instruments was devised. Preferred stock was issued first in 1830, when the Baltimore and Ohio ran out of funds and appealed to the Maryland legislature. The state sought to protect itself by asserting a first claim on earnings. Early preferred stock was cumulative, participating, voting, and temporary. All these characteristics were later varied and combined in different relationships. Debt financing was typical from the beginning of the railway era; and a wide variety of forms, sound and unsound, was evolved during the century. This variety of financing techniques developed by the railways became available to the growing industrial corporations after the Civil War. Still, as late as 1900, three-quarters of the corporations whose securities were listed on the New York Stock Exchange were railways.
The wide variety of financial instruments in common use created a similar variety in the participation rights of various types of security holders to capital and earnings. In theory, participants, at least in equity, were all bound together in a common interest and all working toward a common end. In fact, their interests and purposes tended to differ substantially. With this proliferation of securities, management acquired powers to apportion earnings and assets among various participants that were in addition to and distinctly different from older powers to manage the enterprise. Corporate law has slowly taken cognizance of this difference and, to prevent or limit the possibilities of exploitation inherent in the ability to influence participation rights in earnings and assets, has been developing the doctrine that all such powers have been granted only in trust, to be used equitably among the participants.
The great merger movement of 1897–1903 created in the industrial area corporations of a size that had formerly been by and large limited to the field of railway transportation. It was during this period that the big “twos,” “threes,” and “fours” characteristic of so many American industries were largely established. These large manufacturing and mining corporations, together with the older railway enterprises and the rapidly growing corporations in the newer utilities, were organizations substantially different from private businesses incorporated for tax reasons or to secure the advantages of limited liability. Their market position, absolute size, and internal organization created a set of problems essentially unknown to the world of the early nineteenth-century, family-type corporation. [SeeMergers.]
Typically, these large corporations possess assets of $250 million or more, employ 5,000 or more workers, count their stockholders in thousands or hundreds of thousands, account for a relatively large share of output in their respective industries, and operate establishments in a number of different locations. A relatively small number of such corporations account for a large percentage of the economic activity in manufacturing, transportation and utilities, mining, banking and insurance, and in certain branches of commerce. A recent compilation of corporate income tax returns revealed 525,000 active nonfinancial corporations in the United States with assets of $413,000 million. The 202 largest of these, all with assets of $250 million or more, owned 40 per cent of total corporate assets.
This is not a recent development in the United States, nor is it limited to the United States. Although the evidence is far from complete, it suggests no significant increase during the last four or five decades in the share of business activity (by various measures) accounted for by the largest corporations in the areas of manufacturing, mining, and public utilities. Such increase in concentration as has occurred in the economy as a whole during this period is mainly to be attributed to the decline in the relative importance of agriculture, a typically small-enterprise sector. And with the relative growth of service industries, it is possible that concentration in the economy as a whole may even decrease. Recent studies in Canada, Britain, and western Europe suggest a degree of concentration that, by certain measures, is higher than in the United States. The large corporations in the United States are much larger than elsewhere, but so also is the economy.
Nevertheless, the facts indicate a situation in which a few very large corporations account for a high percentage of business activity in a number of important sectors. And there is, moreover, a high correlation between absolute size and relative size within the different sectors and the industries constituting the manufacturing sector. The “twos,” “threes,” and “fours” in most industries tend also to be very large corporations. It is the relation between relative and absolute size that occasions most of the concern for what is commonly called “the problem of the large corporation.” [SeeEconomies of scale; Industrial concentration.]
A high degree of concentration in a particular industry, i.e., a measure of relative size, is commonly supposed to indicate a substantial degree of monopoly power. The difficulties, however, of assessing the “degree of monopoly” are so formidable that it is doubtful whether this is a useful concept. An industry, however defined, inevitably differs so substantially from a market, within which it is appropriate to discuss the relations of monopoly and competition, that the one substitutes only very imperfectly for the other. Products of one industry compete with products from another, and firms in one industry are sheltered by transport costs from the competition of other firms in the same industry. It may be possible through the study of the structure of particular industries and of the behavior of firms within this structure to come to a more or less objective judgment that the area of choice or scope of decision making of large firms is significantly greater than that of small firms or of firms whose behavior is compatible with the competitive model, but this is about as far as agreement among different students of the problem can be pushed. [See the articlesMarkets and industries; Monopoly.]
The area of choice or scope of action open to the large corporation has a good deal to do with the significance of the “corporate problem.” If large corporations were as circumscribed in their behavior as firms operating within the context of the competitive model, most of the aspects of this problem, as elaborated in the literature of the subject, would tend to disappear. In an atomistically competitive environment, firms—whether incorporated or not—have no alternative but to buy and sell at established market prices; and a failure to maximize profits is tantamount to a failure of the firm. Under these circumstances, the legal characteristics or the internal organization of the firm is irrelevant to its behavior. Economic analysis has, in fact, tended to neglect questions of internal organization and to assume that entrepreneurial behavior is unaffected by the absolute size of firms. There is reason to believe that the 95 per cent of American corporations employing fewer than 20 workers do indeed behave much as do small proprietorships and partnerships. Insofar, however, as large corporations are able to escape from competitive market restraints, they command an area of decision making within which behavior may be significantly affected by absolute size and the character of their internal organization. [SeeCompetition.]
The aspects of size and internal organization most often stressed in the literature on the large corporation are the separation of ownership from control, the growth of a managerial class with motivations allegedly different from those of the classical nineteenth-century entrepreneur, and a changing relationship of the corporation to government and to the local community. The separation of ownership from control is alleged to be producing, on the one hand, a change in the meaning and significance to be attached to private property and, on the other, a group of manager-controllers no longer owing exclusive responsibility to owners but also to other groups, such as suppliers, workers, and customers, who are attached in one way or another to the corporation. The management groups in large corporations are said to be self-selected and their activities to have the customary bureaucratic characteristics: hierarchical organization, professionalization of function, formality of recruitment and promotion procedures, and a proliferation of written rules, orders, and record keeping. The changing relation of the large corporation to government is described by some as an increasing vulnerability of size to public opinion and governmental action or threats of action, and by others as increasing opportunity for manipulation of public policies by large business as a “system of power.” The changing relation to the local community is supposedly the product of multiestablishment corporations whose local installations are run by hired managers with only tenuous roots in the community. Obviously, some of these assertions are more speculative than others.
Separation of ownership and control
An increasing separation of ownership from control of the large corporation was clearly portrayed in the classic study of Berle and Means, The Modern Corporation and Private Property (1932). Nothing has appeared since then to deny this thesis, and much to confirm it. Very few among the largest corporations in the United States could be correctly described as majority-controlled. A larger number are controlled by discernible minority interests but, under the influence of estate duties, this group is declining relatively. A still larger number can only be described as management-controlled, and this number is increasing. The dominant influence at work, of course, is the increasing percentage of equity holdings in the hands of those concerned with returns rather than control. Management control has been assisted by such devices as voting trusts, nonvoting and multiple-voting stock, and pyramiding; but the trend to management control would exist without these devices. Nor has the securities legislation of the 1930s in the United States, which sought to support “shareholders' democracy” by regulating the system of proxy voting, had significant effect on this trend.
Much less clear, however, are the effects, if any, on the controllers and on the owners of the separation of ownership from control. Wide dispersion of shareholdings has accentuated certain characteristics of corporate ownership that have been there from the beginning. The shareholder of today has typically become a rentier concerned only with dividends and capital gains, but this is implicit in an organization that puts many capitals together to form a joint stock. In Berle's words, “The capital is there, and so is capitalism. The waning factor is the capitalist” (1954, p. 39). The capitalist as owner-manager of a local grist mill or corner garage is indeed hard to discover in the owner of 100 shares of Standard Oil. Eighteenth-century justifications of private property become somewhat obsolete in this context. But whether the stock-and-bond owner of the twentieth century is any less devoted to the institution of private property than the “full-blooded capitalist” of the nineteenth century is not obvious.
Nor is it clear to what extent the separation of ownership from control has affected the behavior of the firm. Managements of large firms typically and increasingly recruit their own replacements, taking account frequently of the interests of large lenders, investors, and possibly suppliers and customers; but without consulting the amorphous mass that represents majority stockholdings. This procedure of self-recruitment and self-replacement of management, together with a certain vagueness as to whom management owes responsibility, does raise questions concerning the “legitimacy” of managerial power. But it does not follow that this power, whether legitimate or not, is used very differently than it would be if it were in the hands of owners. There is considerable evidence that, with respect to policies affecting dividends, retention of earnings, and relative reliance on outside financing, separation of ownership from control has not had much influence. In other areas the supposed influence is rather speculative. Furthermore, there are influences other than the separation of ownership from control that impinge on the behavior of the large corporation.
Role of size
Absolute size, particularly if measured in terms of numbers of employees, regardless of the location of ultimate control, creates a managerial problem for which bureaucracy is the only answer. Major decisions tend to be group decisions in which the divergent interests of separate functional or area divisions of the corporation are represented by established suborganizations with procedures and expectations of their own. Authority that would be centralized in a small firm is delegated, but within the limits necessary to the maintenance of cohesion in the organization as a unit. The major as well as the minor decision makers are hired employees whose principal remuneration is by salary and whose expectation of economic improvement is through advancement in the hierarchy.
Insofar as absolute size is correlated with size in relation to the markets in which the corporation purchases inputs and disposes of output, the possibility exists of escape from the profit-maximizing behavior necessary to the continued existence of the competitive form. This is true whether the corporation is owner-controlled or management-controlled. But whether a management-controlled firm is more prone to take one or another course of action alternative to profit maximization than an owner-controlled firm is not clear.
The large corporation is likely to be confronted, on both the buying side and the selling side of the market, with units that are also large and well organized. In the capital market it confronts large banks, insurance companies, and other institutional investors well able to look after their own interests as capital suppliers. In the labor market it typically deals with large trade unions. The distribution of its product is frequently through dealers who are well organized and often protected by antidiscriminatory legislation. Finally, the large corporation acts within a political and social environment in which its size and conspicuousness make it a legitimate object of political inquiry and of public interest.
The large corporation is, then, typically management controlled; it is bureaucratically organized; it is usually able to escape to some degree from the competitive restraints that would compel action within a narrow range of alternatives; it is frequently confronted on the buying and selling sides of the market with large and well-organized units or groups; and it operates in a political and social environment in which its size makes it conspicuous. How these various characteristics act and react on each other and what influence, in concert, they have on the behavior of the large corporation is a subject on which there exists a large body of literature but little hard evidence. There does seem, however, to be substantial agreement that the “managerial capitalism” of the twentieth century is a different entity from the “classical capitalism” of the nineteenth and that the emergence of the large, multiproduct corporation, with widely dispersed shareholding, lies at the heart of the difference.
There is strong emphasis in the literature of managerial capitalism on the proposition that profit maximization, as it was understood in the nineteenth-century context, does not now govern the behavior of the large corporation. By some this is interpreted to mean that long-run considerations rather than considerations of immediate gain are determining. Some hold that there are groups in addition to the owners whose interests are considered in the distribution of the gross proceeds of the corporation. Still others maintain that in a management-controlled corporation there are managerial preferences, running counter to profit maximization and concerned with the security and continued growth of the firm, that significantly influence corporate behavior. It must be said that whether corporations do or do not maximize long-run profits is not a proposition subject to statistical demonstration. Profit maximization can be precisely defined only in a static context with known cost and revenue functions. Any demonstration that corporations do not follow profit-maximizing procedures must produce weighty evidence of behavior clearly incompatible with any plausible concept of profit maximization.
That large corporations shape their price, output, and other policies with a relatively long time horizon in view does not require demonstration. But such behavior is not limited to large firms, nor is it dependent on particular forms of business organization. It is, rather, technologically determined and is dependent on the length of life of various inputs and on the possibility of cultivating persistent customer attachment.
Assertions that management is no longer exclusively responsible to ownership but owes obligations to labor, suppliers, customers, and others abound in writing on corporate management. But a distinction must be drawn between changes in the environment external to the corporation, to which management may react in ways that are compatible with sensible conceptions of profit maximization, and internal changes in corporate organization, creating obligations to interests other than ownership and incompatible with any principle of profit maximization. The twentieth-century corporation confronts an external politico-economic environment substantially different from that of its nineteenth-century counterpart. It would be strange if profit-maximizing behavior did not adapt itself to this environment. Increased emphasis on institutional advertising, expenditures devoted to improving the “corporate image,” grants for university scholarships, contributions to local community chests, the lending of executive personnel to various types of government service, are all evidence of an adaptive reaction to the changed environment within which the corporation operates; but they are not necessarily evidence of departure from profit maximizing.
Somewhat more persuasive is the argument that, in managerially controlled corporations in which the principal decision makers are not profit receivers, managerial preferences are likely to run counter to sensible interpretations of profit maximization. The obligations that management recognizes are not so much to various interest groups as to itself. Management compensation tends to be highly correlated with the size of the firm. So likewise are power, prestige, and status. It is suggested, therefore, that management's concern is centrally with the growth of the enterprise at rates and in ways that do not endanger the continued viability of the firm or the position of the existing officeholders. This may or may not be compatible with a sensible interpretation of profit maximization. There is a certain plausibülty to, and some evidence for, this proposition. It would be rather strange if the relaxation from immediate competitive pressures attendant on relative size, the administrative changes attendant on absolute size, and the expansion of managerial control had not had some significant influence on managerial preferences. Nevertheless, it must be said that these suggestions have not as yet been shaped into a clear and persuasive account of managerial motivation and behavior.
Edward S. Mason
Anshen, Melvin L.; and BACH, G. L. (editors) 1960 Management and Corporations, 1985. New York: McGraw-Hill.
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Baumol, William J. 1959 Business Behavior, Value and Growth. New York: Macmillan.
Berle, Adolf A. JR. 1954 The Twentieth Century Capitalist Revolution. New York: Harcourt.
Berle, Adolf A. JR.; and Means, G. C. 1932 The Modern Corporation and Private Property. Chicago: Commerce Clearing House.
Cohn, Georg 1921 Die Aktiengesellschaft. Edited by Frederick Fick and Richard Zehntbauer. Zurich: Füssli. → Published posthumously.
Davis, John P. (1905) 1961 Corporations: A Study of the Origin and Development of Great Business Combinations and Their Relation to the Authority of the State. 2 vols. New York: Putnam.
Davis, Joseph S. 1917 Essays in the Earlier History of American Corporations. 2 vols. Harvard Economic Studies, Vol. 16. Cambridge, Mass.: Harvard Univ. Press.
Dodd, E. Merrick JR. 1954 American Business Corporations Until 1860: With Special Reference to Massachusetts. Cambridge, Mass.: Harvard Univ. Press.
Dodd, E. Merrick JR.; and Baker, R. J. (1940) 1951 Cases and Materials on Corporations. 2d ed. New York: Foundation Press. → First published as Volume 1 of the authors' Cases on Business Associations: Corporations.
Drucker, Peter F. 1946 Concept of the Corporation. New York: Day.
Du Bois, Armand B. 1938 The English Business Company After the Bubble Act, 1720–1800. New York: Commonwealth Fund; Oxford Univ. Press.
Florence, P. Sargant 1953 The Logic of British and American Industry: A Realistic Analysis of Economic Structure and Government. London: Routledge.
Gordon, Robert A. 1945 Business Leadership in the Large Corporation. Washington: Brookings Institution. → A paperback edition was published in 1961 by the Univ. of California Press.
Gossett, William T. 1957 Corporate Citizenship. Lexington, Va.: Washington and Lee Univ.
Hunt, Bishop C. 1936 The Development of the Business Corporation in England; 1800–1867. Harvard Economic Studies, Vol. 52. Cambridge, Mass.: Harvard Univ. Press.
Kaysen, Carl 1957 The Social Significance of the Modern Corporation. American Economic Review, Papers and Proceedings 47:311–319.
Marris, Robin L. 1963 A Model of the Managerial Enterprise. Quarterly Journal of Economics 77:185–209.
Mason, Edward S. 1958 The Apologetics of “Managerialism.” Journal of Business 31:1–11.
Mason, Edward S. (editor) 1960 The Corporation in Modern Society. Cambridge, Mass.: Harvard Univ. Press.
Penrose, Edith T. 1959 The Theory of the Growth of the Firm. New York: Wiley.
Radin, Max 1910 Legislation of the Greeks and Romans on Corporations. New York: Tuttle.
Rousseau, Rodolphe (1878) 1912 Des sociétés commerdales françaises et étrangères. 2 vols. 4th ed., rev. & enl. Paris: A. Rousseau.
Scott, William R. 1912 The Constitution and Finance of English, Scottish and Irish Joint-stock Companies to 1720. 3 vols. New York and London: Macmillan.
Warner, W. Lloyd 1962 The Corporation in the Emergent American Society. New York: Harper.
"Corporation." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/corporation
"Corporation." International Encyclopedia of the Social Sciences. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/corporation
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CORPORATIONS. A corporation is an independent entity: it exists separately from its owners, the shareholders. Most corporations are businesses for profit that raise capital for corporate activities by selling shares of stock, which represent ownership and are transferable. There are also charitable, cooperative, municipal, and religious corporations, all of which have distinctive features. A corporation's shareholders elect the board of directors that hires the corporation's officers, who run the day-to-day business. For many purposes, the corporation is treated as if it were a person. The corporation can sue or be sued, enter into legally binding agreements, and own property.
One important element of the corporate form is that it allows for limited liability. The liability of individual shareholders is limited to the amount they actually invested, even if the corporation runs up large debts. However, there are extreme cases in which shareholders can be held liable for the acts of a corporation—a situation called "piercing the corporate veil." American courts have developed several criteria in determining whether or not to pierce the corporate veil. One factor the courts consider is whether the corporate action involves a contract or personal injury–type action, in which case the person affected normally has no choice but to deal with the corporation. The courts may also hold shareholders liable for corporate actions when the shareholders are involved in fraud or some other wrongdoing, such as siphoning off company profits. This occurs most often in closely held corporations, with very few shareholders and in which the majority shareholder plays a substantial role in company management. Other occasions on which courts have held shareholders liable are when the corporation was knowingly undercapitalized and when it failed to follow normal corporate formalities, such as issuing stock or keeping corporate meeting minutes.
One benefit that corporations provide is that they are freely transferable, with ownership interests in the corporation represented by shares that can be sold quickly and easily, without many limitations.
Origins of the Modern Corporation
The modern corporate form is a combination of two historical types of companies: the joint-stock company, actually a partnership between shareholders, and the traditional corporations that had originally been developed for medieval guilds, municipalities, monasteries, and universities in England. The first American corporations were monopolies chartered by the English Crown in the sixteenth century, with the intent of pursuing profit in the New World. Before the American Revolution, the London and Plymouth companies, Massachusetts Bay Company, and Hudson's Bay Company played a large role in establishing and supporting the European colonies. The royal charter of these companies allowed them to control governmental functions like customs regulation and terms of trade, as well as the formulation of foreign policy within their jurisdictions.
In the eighteenth century, corporations' exercise of essential government functions was curtailed and courts began to hold that the trade monopolies excluded fair competition from other incorporated companies. However, since companies who were incorporated at that time could lawfully compete with the monopolies, a great deal of economic activity was organized by single proprietors or partnerships under existing contract and property common law.
State Control of Incorporation
After 1776, the power to grant incorporation moved from the Crown to individual state legislatures. The interstate commerce clause in the U.S. Constitution granted incorporators the freedom to incorporate in one state without limiting their ability to transact business in other states. States eventually began to compete, liberalizing their laws to attract more requests for incorporation.
At first states passed a special act for each incorporation, but in 1811 New York enacted a general incorporation law that enabled the secretary of state to grant charters. The general incorporating statute enacted by New York was of limited application. The Connecticut incorporating act of 1837 was broader and more flexible, and New Jersey went on to create an incorporating act in 1875 that included a number of the provisions businesses had long sought from other states. But the privileges granted by corporate charters remained insufficient to facilitate the centralization of manufacturing that some businesses desired. In response, New Jersey enacted laws greatly liberalizing its 1875 act.
In the Dartmouth College Case of 1819 (Trustees of Dartmouth College v. Woodward), the Supreme Court held that an incorporation charter was a binding contract between a state and a corporation. Thus, the charter could not be altered without the corporation's consent. Since that decision, however, few perpetual charters have been granted and states have specifically reserved the right to alter or annul incorporation charters.
Individuals wishing to incorporate a business, or incorporators, must file an official document—called the articles of incorporation—with the secretary of state and pay a filing fee. The articles of incorporation must contain the corporation's name, a purposes clause, and form of capitalization (the number of shares the company plans to issue). Until the late 1880s, corporations were created for very limited and well-defined purposes, and the articles of incorporation would explain their corporate structure in great detail. In addition, the incorporators were forced to prove to the legislature that the corporation would serve a public purpose, should the state grant them the right to incorporate. In the twentieth century, though, corporations were allowed to provide a very broad purpose, and most companies used the phrase "to engage in any lawful business" or something similar.
The state in which a company incorporates is important, since the law of that state will control most matters, including acquisitions, mergers, and powers of the board of directors. At the end of the twentieth century, many businesses chose to incorporate in Delaware because of the state's extensive history of corporate formation and its finely tuned statutes and accompanying case law.
Growth of Corporations
The U.S. Constitution gives Congress the power to regulate commerce between the states and with foreign nations, a power that Congress used to charter national banks and transcontinental railroads in the nineteenth century. Congress has used its power solely to regulate state-chartered corporations through various federal rules, including extensive antitrust laws, rather than engaging in federal incorporation.
The end of the nineteenth century saw an unprecedented expansion and dominance of the corporate form. Large companies like the Standard Oil Company and United States Steel began to exercise monopolistic powers in their respective markets. Public concern over the abuses exercised by these behemoth corporations led to antitrust legislation, laws restricting business practices considered unfair or monopolistic and aimed at preserving competition. In 1890, Congress enacted the Sherman Antitrust Act to prevent interference with interstate trade and to promote a freely competitive market.
Between 1875 and 1893, the New Jersey legislature enacted a series of statutes intended to liberalize its 1875 incorporation laws. Previous legislation designated the geographical region in which a corporation incorporated in New Jersey could hold property and do business. In 1887, the state amended the law to allow foreign corporations to own real estate in New Jersey. Five years later, the state removed all restrictions on companies incorporated in New Jersey that were doing business outside the state. While earlier laws had restricted growth in other ways, the new revised laws greatly facilitated corporate growth and mergers. The revisions granted corporations the power to merge, increase amounts of capital stock, exchange newly issued stock for property, and purchase stock in other corporations.
In 1895 the Supreme Court declared that the federal government did not have the power to prevent a state-charted corporation from acquiring control of manufacturing plants producing 98 percent of the refined sugar in the nation (United States v. E. C. Knight Company). Combined with the liberal incorporation laws of New Jersey, corporate combinations that would have otherwise been considered restraints on trade were declared legal. A relatively few large corporations now controlled American industry, and with the simultaneous relative decline of agriculture, the American economy shifted from one organized primarily around small businesses to an industrial nation.
In 1903 Congress reacted to the movement toward mergers and oligopolies by creating the Antitrust Division of the Department of Justice. The government also established the Bureau of Corporations, with the mission of investigating and publicizing the control of industries by corporations.
Largely based on the work of the Bureau of Corporations, the Supreme Court ordered both the Standard Oil Company and American Tobacco Company to be dissolved in 1911. Woodrow Wilson became governor of New Jersey that same year, and began mounting an effort to return to a more restrictive approach to incorporations. In response, companies began leaving New Jersey and incorporating in Delaware, which had liberal statutes very much like those of New Jersey prior to the restrictive measures. When New Jersey later amended its statutes to undo the Wilson-era reforms, many of the corporations that had moved to Delaware could find no reason to move back.
In 1914 Congress passed the Clayton Antitrust Act to supplement the Sherman Act. This new federal law included specific provisions prohibiting the contract tying, exclusive dealing contracts, mergers, interlocking directorates, and price discrimination that tended to lessen competition or create a monopoly. But in 1920, in the United States Steel case, the Supreme Court sanctioned a corporate structure in which one company controlled about half of the steel industry. Thirty years later, the federal government again strengthened the law on corporate mergers and acquisitions with the creation of the Celler-Kefauver Act.
The federal government continued strengthening corporate regulations with the creation of the Securities Exchange Act, regulating the use of manipulative or deceptive methods in the purchase or sale of securities (the stocks, bonds, notes, convertible debentures, warrants, or other documents that represent a share in a corporation). The Act's original intent was to prevent company insiders from making false statements about a company's health, so that they could buy shares of stock at lower prices. It was not until later in the century that the practice of receiving inside information to buy and sell stocks for the largest gain became common.
Despite the original requirement for corporations to serve the public interest, the public's confidence in corporations began to wane in the 1960s. Labor unions and collective bargaining grew in response to public wariness around corporations. In the 1960s and 1970s, the power of corporations over the lives of consumers also elicited the growth of public interest law firms, class-action suits, and organized political and educational activities by groups of consumers and environmentalists.
The Rise of Conglomerates
Eventually, another form of corporation would emerge. Conglomerates are corporations that consist of a number of different companies operating in diversified fields, often only indirectly (or not at all) related to other corporate divisions. Conglomerates became increasingly popular during the late 1950s and early 1960s because such entities could make acquisitions and grow, yet maintain immunity from the antitrust prosecution that companies faced when making acquisitions in the same line of business. Thus businesses that were constrained within their own industry were able to freely expand into different markets.
Some of the traditionally powerful American corporations began to lose their influence in the late 1960s. The government continued strengthening its antitrust efforts, launching attacks on various conglomerates that misstated earnings. The federal government turned its attacks on IBM in 1969 and AT&T in 1974. In addition, the increasing ease of travel for business contributed to a global economy with increased market competition. As industry internationalized, American business transformed. Competition for American dollars moved from a national to a multinational stage. In fact, almost all of the largest American corporations at the beginning of the twenty-first century operated in world markets directly or through subsidiary corporations.
By the 1970s, a handful of communications media, education, research and development, computing machines, and financial and real estate companies accounted for as much as 40 percent of the country's gross national product. Microsoft, a developer of personal computer software systems and applications, was formed in 1975. The corporation moved to the front of the software market in the 1980s when its operating system became the standard for personal computers across the country. By 1993, its newest operating system release was selling more than one million copies per month. Three years later, its net income topped $2.1 billion, and it could be argued that Microsoft is the corporation that had the largest impact on American history in the twentieth century. However, the company faced charges of unfair competition and a Department of Justice investigation in 1994. In 1996, the Department of Justice reopened its investigation and, following a 30-month trial, found the corporation guilty of antitrust violations and ordered its breakup. An appeals court overturned the breakup order, but found the company guilty of trying to maintain a monopoly.
Enron Corporation, formed from the merger of natural gas pipeline companies Houston Natural Gas and InterNorth, was exposed for inflating profits in 2001. A Wall Street Journal report disclosed that Enron took a $1.2 billion charge against shareholder equity. Shortly thereafter, Enron announced that it had overstated earnings by almost $600 million, dating back four years. The Department of Justice opened a criminal investigation and found that the company actually inflated profits by $1 billion. The government also indicted Enron's accounting firm, Arthur Andersen LLP, for obstructing justice, based on evidence that the company in appropriately shredded documents related to the Enron bankruptcy.
Not long after Enron's questionable accounting practices were revealed, WorldCom, Incorporated, disclosed that it had hidden $1.2 billion in losses by failing to report $3.85 billion in expenses. The Securities and Exchange Commission (SEC) charged the long-distance telephone and data services company with fraud. The company's cofounder and chief executive officer resigned amid an SEC investigation that included questions about $366 million in personal loans from the company. Shares of WorldCom, which had flown to $64 in 1999, dropped to $.09 by July of 2002. Under the weight of both $30 billion in debt and the federal investigations, the company filed for bankruptcy, becoming the nation's largest company to ever declare insolvency.
In July 2002, as the American public voiced concern around corporations and their apparent disdain for the public interest, the U.S. stock market tumbled and the government again pledged to investigate corporate activities. The SEC began investigations of Qwest Communications International, Inc., Global Crossing Ltd., and other corporations. As more scandals of spurious accounting practices emerged across the country, some experts marveled at the irony that the increased competition resulting from antitrust legislation may have encouraged certain companies to cross the line of legality in order to remain viable.
Beatty, Jack, ed. Colossus: How the Corporation Changed America. New York: Broadway, 2001.
Kaysen, Carl. The American Corporation Today. New York: Oxford University Press, 1996.
Sobel, Robert. The Age of Giant Corporations: A Microeconomic History of American Business, 1914–1992. Westport, Conn.: Praeger, 1993.
Soderquist, Larry D., et al. Corporations and Other Business Organizations: Cases, Materials, Problems. 4th ed. Charlottesville, Va.: Michie, 1997.
"Corporations." Dictionary of American History. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/history/dictionaries-thesauruses-pictures-and-press-releases/corporations
"Corporations." Dictionary of American History. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/history/dictionaries-thesauruses-pictures-and-press-releases/corporations
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A business corporation is a legal entity permitted by law in every state to exist for the purpose of engaging in lawful activities of a business nature. It is an artificial person created by law, with many of the same rights and responsibilities possessed by humans. Corporations are widely prevalent in the United States and virtually every large enterprise is a corporation.
RIGHTS AND PRIVILEGES OF A CORPORATION
Within legal guidelines, corporations may issue stock, declare dividends, and provide owners with limited liability.
A corporation can issue and attempt to sell stock. Every share of stock owned represents a share of the corporation's ownership.
From the standpoint of stock sale, there are two kinds of corporations: public and private. With a public corporation, anyone can buy shares of stock, which may very well be traded on a stock exchange. With a private corporation, however, sale of stock may be limited to stipulated persons, such as members of the principal stockholder's family.
A corporation can own "treasury stock"; that is, it may repurchase its own stock that it had previously issued and sold.
A corporation may even give its stock away for any reason; for example, as a donation to a charity, or as a reward to employees for industrious service.
A corporate board of directors has the authority to declare and pay dividends in the form of cash or stock. Cash dividends are ordinarily payable from current net income, although net income "kept" from previous years may also be used. A common name for net income kept is "retained earnings." Recipients of stock dividends receive shares of stock in the corporation, thereby increasing the total number of shares they own. Stock dividends are declared from capital stock that has been authorized but not issued.
Rules exist regarding eligibility for receipt of a dividend. For example, assume that a cash dividend is declared on August 15, payable on September 15. If Stockholder A owns the stock on August 15, he or she receives the dividend on September 15. If Stockholder A sells the stock on August 27, Purchaser B buys it "exrights," meaning that on September 15 the dividend still goes to Stockholder A. Purchaser B would not receive a dividend until the next one is declared, perhaps on November 15.
|Example of stock split|
|2 for 1 stock split||Shareholder owns||Value of shareholder's shares on corporation's records|
|Per share||Total value|
Recipients of cash dividends pay income tax as of the year the dividends are received. Income tax on stock dividends, however, is postponed until the recipients sell the stock.
Occasionally, corporations split their stock. However, this does not change the value of the shareholder's shares on the corporation records or the corporation's net worth. A stock split is a good sign as it is often done to reduce the price of a stock that has risen to a point at which its marketability is impaired. (See Figure 1)
If a corporation suffers large financial losses or even terminates its existence, the shareholders might lose part or all of their total investment. However, that is ordinarily the extent of their loss. Creditors cannot satisfy their claims by looking to the personal assets of corporate shareholders as they can with a sole proprietorship or an ordinary partnership.
Limited liability can be advantageous because it encourages investment in the corporation. With personal assets of $1.1 million, a potential investor might willingly invest $50,000 in a corporation knowing that no risks exist beyond the $50,000.
The limited liability advantage, however, can be lost if the owners directly engage in the company's management and play an influential role in causing corporate losses.
Additional Rights of a Corporation
Corporations have the basic right to conduct a business in which they sell products or services and to engage in either a profitseeking or a non-profit-seeking enterprise.
Corporations have the right to own, sell, rent, or lease real or personal property.
Corporations may sue other business entities, such as another corporation, a partnership, or a sole proprietorship.
Corporations may merge with other corporations.
Corporations may make contracts with either another business or a person.
Corporations may hire or discharge employees of any rank, from entry-level employees to the chief executive officer (CEO).
Corporations may borrow money, and they often do so by issuing corporate bonds. Owning a corporate bond does not grant the bondholder any form of ownership in the company. Instead, corporate bondholders have actually loaned money to the corporation, virtually always with a stated interest rate and with terms regarding dates and methods of repayment. Bondholders may ordinarily sell their bonds to other persons, most often through stockbrokers.
In addition to issuing bonds, corporations may borrow directly from any loan source, such as banks. On occasion, corporations raise needed cash by authorizing and selling additional stock.
Corporations may make any lawful investment. They often invest in the stock and/or bonds of other corporations, personal or real property, mutual funds, money market accounts, certificates of deposit, and government securities.
REQUIREMENTS OR LIMITATIONS OF A CORPORATION
Corporations are subject to risk, to suits, and to income tax liabilities.
By engaging in business activities, corporations are at risk, great or small. Profit-seeking corporations may very well find the large profits they seek. But they risk huge economic losses and even bankruptcy.
Corporations may be sued by any business, including other corporations. They may also be sued by individuals or groups of persons.
Corporations must pay federal and state income taxes on the net profit they make during a calendar or fiscal year. People who receive cash dividends must also pay income tax for the year they are received. Thus it is often said that corporation profits are subject to double taxation. Corporations receive no deduction for any cash dividends that they pay. Recipients of stock dividends, however, postpone payment of income tax on stock dividends until they sell the stock.
REGULATION OF CORPORATIONS
Corporations are subject to two kinds of regulation: regulation by the state in which they are incorporated and regulation by the individual corporation's articles of incorporation and bylaws.
Corporations are regulated by business corporation laws that exist in all fifty states. Although the statutes prescribe what corporations may and may not do, they are written in broad and general language. In essence, then, the states permit articles of incorporation to be written in a manner that permits corporations to engage in business for almost any legal purpose.
The Articles are filed publicly and are available to the public. They are subject to amendment. Bylaws are not filed publicly. Consequently, they tend be more detailed than articles of incorporation.
Members of the board of directors make the major decisions of the corporation. When corporations are formed, they draw up the Articles of Incorporation, usually for approval by shareholders. The board of directors also draws up the initial and ensuing bylaws.
Board members are most often shareholders and officers of the corporation. They are elected by the shareholders. They may be "internal" directors or, for reasons of good public relations or of obtaining of expertise, may work on the "outside" and be selected on the basis of their prominent role in the community.
Policies made by the board of directors are carried out by the corporation's executives, who direct the work of employees under their jurisdiction.
CLASSES OF STOCK
Corporations ordinarily have two classes of stock: common and preferred. The two classes differ in many respects but both also share a number of common characteristics. There is no limit to how many classes of stock a corporation may have.
Common stockholders participate more in the governance of a corporation than do preferred stockholders. This is accomplished by giving common stockholders the right to vote for members of the board of directors as well as on major decisions (e.g., a merger with another corporation). Common stock, however, can be issued without voting rights.
Cumulative voting, which permits shareholders to cast one vote for each share of common stock owned in any combination, is prevalent. In an election for members of the board of directors, for example, a shareholder owning 2000 shares of common stock could cast all 2000 votes for one candidate or divide them in any way among candidates (e.g., 400 votes for each of five candidates). Cumulative voting offers some protection for smaller stockholders.
The market value of common stock tends to fluctuate more than that of preferred stock.
Preferred stockholders are not ordinarily granted the voting rights given to common stockholders. They cannot participate in elections for members of the board of directors or in major decisions of the corporation.
However, preferred stockholders are almost always given prior rights over common stockholders in the matter of dividends.
Dividends for preferred stockholders are often stated in advance and do not tend to fluctuate as much as those for common stock. Preferred dividends may be stated as a percentage of par value or as a dollar amount per share.
However, preferred dividends are not guaranteed in the same sense as is bond interest. Neither preferred nor common stock dividends can be paid without approval of the board of directors. Boards may "skip" declaring dividends if the directors feel the financial situation so warrants.
Preferred stock is often "cumulative." With this provision, a preferred stock dividend that is not declared or paid is considered to be "owed." As long as the preferred dividend is "owed," no common stock dividend may ordinarily be declared or paid. But even if the preferred stock is not cumulative, a frequently applied policy is that common stock dividends cannot be declared as long as the preferred dividends are "in arrears."
Sometimes preferred stock is "convertible." Shareholders who own convertible preferred stock may, at a price announced when the stock is purchased, turn in their preferred stock and receive common stock in its place. Assume, for example, that an investor purchases preferred stock at $36.50 per share. The stock is convertible four years from its issuance at a ratio of 3:1; that is, three shares of preferred stock can be traded at the shareholder's option for one share of common stock. At the 3:l ratio, after discounting any related transfer costs, the preferred stockholder would find it profitable to convert if the common stock value rises above $109.50 per share ($36.50 × 3).
Preferred stock may be "callable." At the option of the corporation, callable preferred stock may be surrendered to the corporation, usually at a price a little above par value (or a stated value). If the stated value is $50, the callable price on or after a specified date might be $51.25. If the stock's market value rises to, say, $55, it might be profitable for the corporation to call for its surrender.
Occasionally preferred stock is given the right to "participate" with common stock in being granted dividends above a stated value. For example, assume the board of directors declares a regular preferred stock dividend at $3 per share and a common stock dividend at $13 per share. With participating rights, it would have been stipulated that preferred stockholders would receive $1 per share more for every additional $5 given to common stockholders.
If a corporation closes down its operation, preferred stockholders have prior claim over common stockholders upon dissolution of the assets. A sufficient amount of the corporation's assets would need to be turned over to the preferred stockholders before common stockholders could claim any part of the assets. In practice, however, assets of a closed-down corporation are rarely sufficient to pay off the preferred shareholders in full.
RELATED FORMS OF BUSINESS OWNERSHIP
Five types of business entities have regulations similar to those of corporations.
Professional corporations, organized under corporation laws of their respective states, involve incorporation by persons engaged in professional practice, such as medical doctors, lawyers, and architects. They are granted limited liability against claims from their clients, except for malpractice.
Not-for-profit corporations, formed under the nonprofit laws of their respective states, have members instead of stockholders. Any income made cannot be distributed to the members.
Some apply to the Internal Revenue Service for taxexempt status, becoming 501(c)(3) organizations, which permits donor gifts to be declared tax-deductible.
Closed corporations, not permitted by statute in all states, limit shareholders to fifty. They permit the firm to operate informally either by eliminating the board of directors or curtailing its authority. Closed corporations also restrict transferability of the owners' shares of stock.
Limited-liability companies enjoy the benefits of limited liability while being taxed like a general partnership. Owners' net income is taxed at an individual personal rate rather than at the rate of a corporation (taxation of both corporate net income and dividends).
Not all states permit formation of limited-liability companies. They are neither a partnership nor a corporation. They generally have a limited life span. Management must be by a small group. States do not restrict the number or the type of members. Unlimited transferability of ownership is not permitted.
S corporations' major benefit is that they are taxed like partnerships. The owners' income tax is based on their share of the firm's total net income, whether or not it is distributed to them. The second huge benefit is limited liability.
However, an S corporation is limited to thirty-five shareholders, none of whom can be nonresident aliens. Only one class of stock may be issued or outstanding. The S corporation may own only 80 percent of a subsidiary business firm.
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Sniffen, Carl R. J. (2001). The Essential Corporation Handbook (3rd ed.). Central Point, OR: Oasis Press/PSI Research.
Spadaccini, Michael (2005). The Essential Corporation Handbook (4th ed.). Irvine, CA: Entrepreneur Media.
G. W. Maxwell
"Corporations." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/finance/finance-and-accounting-magazines/corporations
"Corporations." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/finance-and-accounting-magazines/corporations
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The rise of the corporation to its position of world preeminence has its roots in the corporate consolidation of finance and industry in the late nineteenth century, most especially in the United States. Competition for capital globally and within the confines of the United States played a central role in the rise of U.S. multinational firms, as revealed by an amendment to the New Jersey corporation law of 1889. Until this date, there were only a few large corporate combines of more than $10 million, except in railroads (Horwitz 1992, pp. 83-90; Roy 1997). The amended New Jersey corporation law, designed by William Nelson Cromwell (1854-1948) and his lawyers from the firm of Sullivan and Cromwell and acceded to by the New Jersey State Legislature as a way to attract capital to its domains, helped change all this. Businesses worth hundreds of millions of dollars fled from New York and other locations to set up shop in New Jersey. By the dawn of the twentieth century, roughly seven hundred corporations worth some $1 billion had incorporated in the state (Lisagor and Lipsius 1988, p. 27). With the expenses of New Jersey now paid from corporate fees, and with other regions losing business, rival states adopted similar laws to attract capital, thus largely curbing state regulation of corporations (Horwitz 1992, pp. 83-87).
Competition for capital, which the German sociologist and economist Max Weber (1864-1920) argued was key to corporate influence over states in the world system, thus displayed its power in the United States. Immediately after the New Jersey law’s passage, from 1890 to 1893, the rise of Wall Street and the securitization of finance and equity—a major aspect of the financial expansion of the later twentieth century—began. Corporate stock in the new industrial firms became listed on the stock market and was traded by brokerage firms, being publicly offered for purchase on the stock exchange in 1897 as the U.S. merger movement gathered steam. Stock offerings rose from $57 million to $260 million between 1896 and 1907, and the corporate concentration of U.S. capitalism, warned against by such observers as the French writer Alexis de Tocqueville (1805-1859), was solidified (Horwitz 1992, p. 95).
From 1875 to 1904 approximately three thousand companies merged or consolidated as a full third of the country’s largest firms evaporated through mergers and vertical integration. This is roughly the same percentage of Fortune 500 firms (the largest publicly held firms in the United States) eliminated during the merger wave and corporate restructuring of the late twentieth century as investment bankers and corporate lawyers once again ascended to the top of the corporate hierarchy (Sobel 1998, p. 24). Morton Horwitz argues that “if the private law of corporations—that is, the law regulating relations within the corporation as well as with private parties— had not changed after 1880, it is difficult to imagine how the enormous corporate consolidation of the next thirty years could have taken place” (1992, pp. 85-86).
Much the same can be said of the wave of state-corporate globalization occurring in the first decade of the twenty-first century. The proliferation of multinational corporations and related supranational institutions is directly related to this early adumbration of transnational firms freed from territorial regulation in the late nineteenth century, with its earlier roots in the Madisonian emphasis on property rights in the U.S. Constitution. The American sociologist C. Wright Mills (1916-1962) and others dated the supremacy of corporate power in the United States to the elections of 1866 and the Supreme Court decision in Santa Clara v. Southern Pacific Railroad Company (1886), which declared the corporation a person under the Fourteenth Amendment. However, Horwitz argues: “More probably, the phenomenal migration of corporations to New Jersey after 1889 made legal thinkers finally see that, in fact as well as in theory, corporations could do virtually anything they wanted.” (Horowitz 1992, p. 101). The subsequent replacement of the “artificial entity theory” of the corporation, which “represented a standing reminder of the social creation of property rights” by “the natural entity theory of the business corporation was to legitimate large-scale enterprise and to destroy any special basis for state regulation of the corporation that derived from its creation by the state” (Horwitz 1992, p. 104).
Corporations arose elsewhere, as exemplified by Japan’s zaibatsu —the unparalleled family-controlled banking and industrial collaborations exemplified by Mitsui, Mitsubishi, Dai Ichi Kangyo, Sumitomo, Sanwa, and Fuyo—and Germany’s heavy industrial corporations with links to universal banks. In the 2000s, of course, corporations extend their reach globally, with new corporate firms arising in such East Asian countries as China, Taiwan, and South Korea. With the growing power of corporate firms in the early twentieth century came increased attempts to regulate them, though in the United States antitrust legislation remained subordinate to the need to rely on corporations during wartime and in support of foreign policy. After the wave of nationalization that arose with the Russian, Chinese, and Cuban revolutions, U.S. corporations became increasingly contested and their relative freedom continued to be a mainstay of Western foreign policy.
In the aftermath of the Soviet Empire’s collapse in the early 1990s, thousands of corporate firms and their foreign affiliates control about half of the value of all goods and services in the global economy, while the Fortune 500 is responsible for roughly half of all profits in the U.S. economy. Despite free market rhetoric, corporations are often heavily subsidized by their states; these subsidies include military spending, which is exempted from World Trade Organization bans against certain types of subsidies. Corporate exploitation of developing countries occurs through the use of resources and labor, often through subcontracting, a practice exemplified by one of the world’s largest corporations, Wal-Mart. Meanwhile, foreign direct investment gives developed countries control over the economies of their junior partners. Simultaneously, limited liability serves to shelter shareholders and officers from corporate malfeasance, while the huge amount of money available for criminal defense often limits the severity of punishment for corporate crime, as evidenced in the wave of corporate accounting scandals involving such companies as Enron and Arthur Anderson in the early twenty-first century. Despite this, corporate advertising and public relations continue to be used to manipulate tastes for consumer goods and to put a positive public face on corporate business. In addition, lobbying associations such as the Business Roundtable in the United States represent the increased politicization of corporations as they use their immense power to influence legislation.
SEE ALSO Capitalism; General Electric; General Motors; Lobbying; Transnationalism
Lisagor, Nancy, and Frank Lipsius. 1988. A Law Unto Itself: The Untold Story of the Law Firm Sullivan & Cromwell. New York: Morrow.
Roy, William G. 1997. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, NJ: Princeton University Press.
Sobel, Robert. 1998. Hubris Humbled: Merger Mania, Retribution, Reform—It’s All Happened Before. Barron’s 78 (15): 24–25.
Thomas Ehrlich Reifer
"Corporations." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/corporations
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corporation, in law, organization enjoying legal personality for the purpose of carrying on certain activities. Most corporations are businesses for profit; they are usually organized by three or more subscribers who raise capital for the corporate activities by selling shares of stock, which represent ownership and are transferable. Besides business corporations, there are also charitable, cooperative, municipal, and religious corporations, all with distinctive features. In the United States all governmental units smaller than a state (e.g., counties, cities) are municipal corporations. Certain religious functionaries (e.g., Roman Catholic archbishops) legally are corporations sole.
The legal personality of a corporation is symbolized by its seal and its distinctive name. As a legal person, the corporation continues in existence when the organizers lose their connection with it. In most cases its liability is limited to the assets it possesses and creditors may not seize property of persons associated with the corporation as stockholders or otherwise. Legal personality gives the corporation many of the capacities of a natural person; e.g., it can hold property and can even commit crimes (for which it may be fined and its directors imprisoned).
The Modern Corporation
The modern concept of corporate power holds that the rights of the participants as well as the conduct of the enterprise must be the subject of managerial discretion. The salient characteristic of the modern corporation is the separation of management from ownership. Management of industrial corporations now requires executive managers and a corporate bureacracy to oversee its complex and interlacing activities.
The large business corporation has strongly influenced the control of property in the modern world. The large corporations are typically controlled by a small minority of the stockholders. There are several methods employed by small groups of stockholders to gain control of large corporations. These include pooling of the majority of stock in the hands of trustees having the power to vote it and the use of proxies (agents for the actual stockholders pledged to vote for particular candidates for managerial positions). Proxies are generally successfully used because stockholders rarely attend meetings or name proxies other than those suggested to them by management.
A more recent type of corporation is the holding company, organized to buy a controlling interest in other corporations; this type of corporation typically possesses no physical assets. The amount of cash needed to control a concern is lessened by pyramiding holding companies. This is done by creating a company to hold a voting control of one or more operating companies. A third company is created to hold a controlling interest in the second, and so on. The control of the last holding company is sufficient to control all; and such control, because of the scattering of stock among many small holders, may need the ownership of only 10% or 20% of the stock available.
See also trust.
The Regulation of Corporations
Until 1844 incorporation in England continued to be a matter of special grant by the king or Parliament. New corporations were created in the Industrial Revolution to finance larger economic units, such as railways and steam-driven machinery in factories. In the United States the state legislatures became the chief authorities to grant charters to corporations, although the federal government incorporates in a limited field. Federal charters were granted to both of the Banks of the United States, to certain railroads after the Civil War, and to the Communications Satellite Corporation (Comsat). Corporations owned by the federal government and financed by government appropriations include the Federal Deposit Insurance Corporation, the Community Credit Corporation, and various corporations established to meet emergencies and later liquidated. At first states passed a special act for each incorporation, but in 1811, New York state enacted a general incorporation law enabling the secretary of state to give charters. Since the Dartmouth College Case of 1819, when a charter was held to be a binding contract between a state and a corporation, unalterable and unamendable by the state without the corporation's consent, fewer perpetual charters have been granted, the right of the legislature to alter or annul being specifically reserved in the charter. Variability in state incorporation laws and the ability of corporations incorporated in one state to do business in all other states have allowed corporations to incorporate in the state or states having the most lenient incorporation laws. In general, the history of corporations in the United States has been marked by the abdication of state control over corporations.
See R. Sobel, The Age of Giant Corporations (1984); J. Davis, Corporations (1905, repr. 1986); W. Doran, The Business Corporation in the Democratic Society (1987); J. Bakan, The Corporation: The Pathological Pursuit of Profit and Power (2004).
"corporation." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/corporation
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Along with sole proprietorships and partnerships, corporations were one of the three basic ways of organizing a business. Virtually all of the largest and most powerful businesses in the United States were corporations, and thousands of many very small businesses were as well.
Corporations had specific legal rights and characteristics that made them ideal for engaging in major economic enterprises. The owners of a corporation were not legally liable for more than their own investment in the corporation. In contrast, if the business of a sole proprietor accumulated massive debts the proprietor was personally, legally responsible for all of them. Corporations were thus also known as "limited liability companies." The corporation also did not have to reincorporate or legally reorganize itself every time one of its owners transferred his or her ownership. The buying, selling, and transferring of the ownership shares (called stock) in a corporation did not affect the corporation's legal identity. More, a corporation was a legal "person" in the sense that it could establish contracts, sue (and be sued), and own property just like an individual person. Finally, a corporation would continue to exist even if all the people who originally incorporated it died or ceased to participate in it. Corporations could raise huge amounts of capital by "going public," that is, selling ownership shares to anyone who wanted them. However, even private corporations, owned by only a small group of people (sometimes a family), enjoyed tax advantages that made incorporating an efficient way to organize a business.
The first U.S. corporations began to appear in the early nineteenth century and represented a new version of three older types of business organization: the joint stock company, the monopoly chartered by a monarch, and the medieval corporation (such as universities and trade guilds). The growing American economy needed large, financially strong organizations to build expensive highways, canals, and railroads. At first, individual states issued thousands of special "charters" to establish these new corporations. After the American Civil War (1861–65), states began to compete with each other to attract corporations by writing incorporation laws that offered corporations an increasingly generous range of powers and advantages. Beginning with the Sherman Anti-Trust Act in 1890 the federal government successfully curtailed the power of the big corporations. A century later, this consumer protection process against the corporation was enacted again when the U.S. government sued Microsoft Corporation for "monopolistic" practices.
See also: Civil War (Economic Impact of), Microsoft, Monopolies, Sherman Anti-Trust Act
"Corporation." Gale Encyclopedia of U.S. Economic History. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/corporation
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Clive H. Lee
"corporations." The Oxford Companion to British History. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/corporations
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"corporation." A Dictionary of Sociology. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/social-sciences/dictionaries-thesauruses-pictures-and-press-releases/corporation
"corporation." A Dictionary of Sociology. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/social-sciences/dictionaries-thesauruses-pictures-and-press-releases/corporation
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"corporation." World Encyclopedia. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/environment/encyclopedias-almanacs-transcripts-and-maps/corporation
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cor·po·ra·tion / ˌkôrpəˈrāshən/ • n. a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. ∎ (also municipal corporation) a group of people elected to govern a city, town, or borough. ∎ dated, humorous a paunch.
"corporation." The Oxford Pocket Dictionary of Current English. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/humanities/dictionaries-thesauruses-pictures-and-press-releases/corporation
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What It Means
People often think of corporations as large businesses, such as Barnes & Noble and Wal-Mart, but they can be of any size, from one person to thousands of employees. What makes a corporation different from other companies is that it has a legal identity independent from the people who own or manage it. Thus, Wal-Mart is simply Wal-Mart, regardless of its current owners or directors. Like other types of businesses, corporations might perform any number of activities, including making clothes, building computers, and selling insurance.
Corporations are also defined by how they are owned and managed. A corporation sells stocks (also known as shares), which are certificates that represent ownership in the business. By purchasing stock a person becomes part owner of a corporation. For example, if a corporation had a total of 500,000 shares and a person bought 100,000 shares, that person would own one-fifth of the company. Anyone who owns stock is called a stockholder or shareholder. Shareholders, in turn, elect a board of directors, who oversee the corporation on their behalf. The board then chooses the corporate officers who manage the daily affairs of the corporation. These might include a chief executive officer (CEO), a president, and a treasurer. In the United States corporations must be registered with the state in which they are headquartered.
Corporations enjoy many of the same rights and obligations as individuals. For example, corporations can buy property and sign contracts, and like most individuals, corporations have to pay taxes. Stockholders, moreover, have “limited liability,” meaning they cannot lose more money than they spent to purchase their stock. Even if the corporation goes out of business and cannot pay its bills, a stockholder generally will not lose any personal assets or property, such as a house. Likewise, if a customer were injured at a Kinko’s branch location and decided to sue Kinko’s, that person would not be able to seek damages from any single shareholder in the Kinko’s corporation. Shareholders buy stock with the hope of making money, either from an increase in the value of the stock or from dividends, which are a share of the corporation’s profits.
Other types of corporations include nonprofit corporations, which are often formed for political, religious, or charitable purposes; municipal corporations, which are created by local governments; and government-owned corporations, which sponsor and manage government programs. Organizations such as these, considered nonstock corporations, consist not of shareholders seeking to make profits off of investments but rather of members who vote on policy and procedures.
When Did It Begin
The existence of corporations dates back to ancient India and Rome. Though these early institutions were structured differently from modern corporations, they consisted of individuals who invested money for a specific purpose. In the Middle Ages the Catholic Church was regarded as a corporate structure; everyone understood that the Church was more than the sum of its individual members and that the institution would continue to exist after its current members died. In this sense, the world’s oldest surviving corporation is the Benedictine Order of the Catholic Church, which was founded in 529 ad .
The oldest corporation that most resembles a twenty-first-century business corporation is the Stora Kopparberg mining community in Falun, Sweden. This group received its charter (a document allowing it to do business) from King Magnus Eriksson (1316-74) in 1347. In the early history of the United States, the American government granted only a limited number of corporate charters each year through acts of Congress. To win a charter, a group would have to prove that their corporation would serve the public good, for example, by building roads and canals. Because laws were so strict, many of the largest enterprises in the United States were not corporations. In 1882 John D. Rockefeller (1839-1937) organized Standard Oil as a trust (a collection of companies overseen by a board of directors, or trustees). In 1889 Andrew Carnegie (1835-1919) established his steel empire as a limited partnership (a company in which two or more people, or partners, manage a business together and are personally responsible for the company’s debts). New Jersey and Delaware were among the first states to write laws that were friendly to the development of corporations. Today many corporations are still chartered as “Delaware corporations” because this state has the most corporate-friendly laws.
More Detailed Information
At one time corporations could receive a charter only through an act of legislation, but today corporations typically submit documents called articles of incorporation and pay a yearly filing fee, which ranges from $100 to $800 depending on the state in which the group is seeking to incorporate. The articles of incorporation include information about the nature of the corporation, the amount of stock available to shareholders, and the names and addresses of its directors. After a charter has been granted, a corporation’s board of directors meets to draft the organization’s bylaws, which state the corporation’s internal operating procedures. In the past, corporate charters were issued for a specific, finite period of time, after which corporations were often dissolved and their assets distributed among shareholders. Today corporations can enjoy an unlimited lifespan, provided that they obey all laws and pay their yearly filing fee.
In the United States most corporations are registered with a state government rather than with the federal government. Corporations are subject to laws of the state in which they are registered. Because laws pertaining to corporations vary from state to state, many corporations register in one state but conduct operations from another. For example, many corporations seek registration in Delaware because this state does not charge tax on activities outside the state. Corporations seeking privacy and increased protection of assets often register in Nevada because it does not mandate disclosure of share ownership. In such cases corporations are also subject to the laws of their host state in matters pertaining to employment, civil actions, crimes, and contracts.
A traditional for-profit corporation is called a C Corporation because it is taxed under Subchapter C of the United States tax code. It could be said that a C Corporation is taxed twice. First, the corporation, as a single entity, is taxed for its profits. Next, individual stockholders are taxed on the dividends, or payments, they receive. Another type of corporation is called an S Corporation, which is taxed under Subchapter S of the U.S. tax code. An S Corporation is taxed as if it were a partnership. In a partnership all profit is passed directly to each partner, who in turn pays taxes as an individual. In order to be eligible for S Corporation status, a corporation must be based in the United States and have 100 shareholders or less. All shareholders must be U.S. citizens. In addition, this group must have only one class of stock (with only one kind of voting and dividend arrangement), and profits and losses must be allocated in direct proportion to each stockholder’s financial share of the corporation.
In the case of what are known as public or publicly traded corporations, investors buy and sell corporate stocks through a stock market, such as the New York Stock Exchange or the Nasdaq. The largest U.S. businesses, such as Google and Nike, are publicly traded corporations. The majority of corporations, however, are not. These enterprises are called privately held or close corporations and are managed by small groups of businesspeople. Publicly traded and privately held corporations do business in similar ways, but publicly traded corporations are subject to stricter laws and more intense scrutiny, especially with regard to mergers with other corporations and elections of directors. Many of the largest corporations, such as Coca-Cola, Wal-Mart, Starbucks, and Microsoft, have grown beyond the national level and have established a presence throughout the world. These are called multinational corporations.
Since the 1990s centers of corporate activity have shifted from the United States and Western Europe to Asia, particularly China. By 2005 Asia, excluding Japan, accounted for 13 percent of the world’s economy, while Western Europe accounted for 30 percent. It was estimated that by 2025 those figures would be nearly equal. That shift was expected to be even more dramatic in the technology industries, affecting where corporations would hire their workers. In the past large American and Western European corporations established factories in developing (poorer and less industrialized) countries, including India and China, so that they could pay low wages to an unskilled labor force. While that practice has continued, corporations have increasingly sought skilled labor, such as computer programmers, from these same developing countries, also at lower wages. In 2005 33 million of the world’s young professionals came from developing countries, which was more than twice the number of those in developed (wealthy and more industrialized) countries.
"Corporation." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/corporation
"Corporation." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/corporation
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Sections within this essay:Background
Laws Governing Corporations
Forming a Corporation
Shareholders, Directors, and Officers
Shares and Dividends
State Corporation Laws
Association of Corporate Counsel
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A corporation is a distinct legal entity created by statute. Corporations have many of the same legal rights and obligations as do individuals. They can own and sell property, they can hold profits or acquire debts, they can enter into contracts and sue or be sued, and governments can tax them. Corporations are advantageous primarily because they become legal entities that are separate and distinct from the individuals who own and control them. This separation is important because in most cases these individuals have limited or no legal liability for the corporation's wrongdoings.
Roman law first developed the concept of corporations, and England adopted the concept long before the founding of the United States. As the states became independent from England in 1776, they too adopted corporations as distinct legal entities and assumed jurisdiction over them. Today, the federal government continues to leave the control of corporations primarily to the states.
Corporations did not become commonplace in the United States until the Industrial Revolution at the turn of the nineteenth century. They then quickly developed as an efficient manner in which to conduct a large enterprise while at the same time offering a degree of protection to investors and owners from legal liability. Investors and owners increasingly were drawn to the idea of the corporation, and today, corporations are a mainstay in domestic and international business.
There are several types of corporations. Private corporations exist to make money for their investors and owners. Non-profit corporations, such as charities, exist to help a certain group of citizens or the general public. Municipal corporations are cities. Quasi-public corporations are entities such as telephone or electric companies that exist to make a profit as well as provide a service to the general public. A public corporation exists to make a profit, but it is distinguishable because it has a large number of investors known as shareholders. Shareholders own portions, known as shares, of the public corporations and may buy, sell, or trade their shares. Closely-held corporations have shareholders also but usually a much smaller group of shareholders. Often, closely-held corporations are owned by members of a family. Shareholders in closely-held corporations usually run the business, whereas shareholders in public corporations usually do not.
Many states based their laws governing corporations on the Model Business Corporations Act, which was first approved by the American Bar Association (ABA) in 1950. This act was significantly revised by the ABA in 1969 and again in 1984. A second popular source for corporation laws is the Delaware General Corporation Law. Delaware has a history of legislation that is particularly friendly to corporations, and so many corporations historically have chosen to incorporate there (see below). Lastly, the American Law Institute has produced Principles of Corporate Governance: Analysis and Recommendations, which courts often rely upon when ruling on matters related to the conduct of a business corporation.
An individual who wishes to start a corporation is known as a promoter. The promoter must find the money to start a corporation. This financing is known as capital and can be the promoter's own money, a loan from a bank or other financial institution, or money from an investor or group of investors who lend money to the promoter typically in exchange for future corporate profits. Before legally forming the corporation, or incorporating, the promoter often locates office or building space to house the corporation, identifies the people who will run the corporation, and then prepares the documents to make the corporation a legal entity. The work accomplished by the promoter prior to incorporation often necessitates contractual arrangements such as leases and loans. Because the corporation does not officially exist yet, the promoter must be the entity that enters into contracts. Later, when the corporation is legally formed, the corporation is considered as having assented to those contracts that were formed to benefit it prior to its official birth.
Corporation laws vary from state to state, but most states have the same basic requirements for forming a corporation. Promoters must file a document called the articles of incorporation with the secretary of state. These articles must include the corporation's name, whether the corporation will exist for a limited period of time or perpetually, the lawful business purpose of the corporation, the number of shares that the corporation will issue to shareholders as well as the types and preferences of the shares, the corporation's registered agent and address for the purpose of accepting service of process in the event that the corporation is sued, and the names and addresses of the corporation's directors and incorporators.
A corporation must also have bylaws, although states generally do not require that corporations file the bylaws with the secretary of state. Bylaws are rules that dictate how the corporation is going to be run. Bylaws are fairly easy to amend. They may include rules regarding the conduct of corporate officers, directors, and shareholders, and typically they designate times, locations, and voting requirements for corporate meetings.
Small corporations frequently incorporate in the state in which they operate. However, promoters can incorporate in any state they wish. Delaware is the most popular state for corporations because the Delaware General Corporation Law has been considered to be so favorable to corporate bodies. With other states recently adopting laws modeled after Delaware's, however, Delaware has lost some of its competitive edge in recent years. Still, Delaware continues to lead the nation in incorporations largely because corporate attorneys throughout the country are familiar with the laws in that state, because Delaware infrequently changes its corporate laws, and because Delaware courts specialize in legal issues regarding corporations.
Shareholders are the individuals or groups that invest in the corporations. Each portion of ownership of a corporation is known as a share of stock. An individual may own one share of stock or several shares. Shareholders have certain rights when it comes to the corporation. The most important one is the right to vote, for example, to elect the corporation's board of directors or change the corporation's bylaws. Shareholders vote on only a very limited number of corporate issues, but they nevertheless have the right to exert some control over the corporation's dealings. Shareholder voting typically takes place at an annual meeting, which states usually require of corporations. Corporations or shareholders may also request special meetings when a shareholder voting issue arises. It is not always practical for shareholders, who may live in various parts of the country or the world, to attend corporate meetings. For this reason, states permit shareholders to vote by authorizing, in writing, that another person may vote on behalf of the shareholder. This manner of voting is known as proxy.
Shareholders also have the right to investigate the corporation's books. So long as the shareholder seeking to investigate the corporation's records is doing so for a proper purpose or a purpose that reasonably relates to the shareholder's financial inter-ests, the corporation must allow the inspection. In some cases, a corporation may require that the shareholder hold a minimum number of shares or that the shares be held for a certain period of time before allowing a shareholder to inspect the corporation's books and records.
A corporation is governed by a board of individuals known as directors who are elected by the shareholders. Directors may directly manage the corporation's affairs when the corporation is small, but when the corporation is large, directors primarily oversee the corporation's affairs and delegate the management activities to corporate officers. Directors usually receive a salary for their work on the corporate board, and directors have a fiduciary duty to act in the best interests of the corporation. These fiduciary duties require the directors to act with care toward the corporation, to act with loyalty toward the corporation, and to act within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the corporation.
The articles of incorporation or the corporate bylaws determine how many directors will serve on the board of directors and how long the directors' terms will be. Directors hold meetings at regular intervals as defined in the corporate bylaws and, in addition, may also call special board meetings when needed. At board meetings, directors discuss issues affecting the corporation and make decisions about the corporation. Before the board can make a decision affecting the corporation, however, there must be a quorum, or certain minimum number of directors, present at the meeting. The precise number constituting a quorum may be determined by the bylaws or by statute.
The fiduciary duty held by directors requires them to act with due care, which means that the director must act reasonably to protect the corporation's best interests. Courts will find a breach of the fiduciary duty when a director engages in self-dealing or negligence. Self-dealing occurs when the director makes a decision on behalf of the corporation that simultaneously benefits the director's personal interests. For example, assume a director for a wholesale foods corporation also owns separately a grocery store. At a corporate board meeting, the director votes to reduce by fifty percent the cost of wholesale apples sold by the corporation to independent grocery stores. Such an act would likely benefit the director's grocery store and could hurt the corporation's profitability. A court would likely determine such an act to be a breach of the director's fiduciary duty toward the corporation.
Directors are not in breach of their fiduciary duty merely because a decision they make on behalf of the corporation results in trouble for the corporation. Directors who base their decisions on reasonable information and who act rationally in making their decisions may not be held personally liable even if those decisions turn out to be poor ones. This legal emphasis on protecting a director's decision-making process is known as the business judgment rule.
The roles of corporate officers—typically the corporation's president, vice presidents, treasurer, and secretary—are defined by the corporate by-laws, articles of incorporation, and statutes. The president acts as the primary officer and sometimes is called the chief executive officer or CEO. The vice president is second in command and makes decisions in the president's absence. The secretary keeps track of the corporate records and takes minutes at corporate meetings. The treasurer keeps track of corporate finances. Corporate officers act as agents of the corporation and have the responsibility of negotiating contracts to which the corporation is a party. When a corporate officer signs a contract on behalf of the corporation, the corporation is legally bound to the terms of the contract. Officers, like directors, also have a fiduciary duty toward the corporation and may be held personally liable for acts taken on behalf of the corporation.
When a corporation engages in wrongdoing, such as fraud, fails to pay taxes correctly, or fails to pay debts, the people behind the corporation generally are protected from liability. This protection results from the fact that the corporation takes on a legal identity of its own and becomes liable for its acts. However, courts will in some cases ignore this separate corporate identity and render the shareholders, officers, or directors personally liable for acts they have taken on the corporation's behalf. This assignment of liability is known as piercing the corporate veil. Courts will pierce the corporate veil if a shareholder, officer, or director has engaged in fraud, illegality, or misrepresentation. Courts also will pierce the corporate veil when the corporation has not followed the statutory requirements for incorporation or when corporate funds are commingled with the personal property of an individual or when a corporation is undercapitalized or lacks sufficient funding to operate.
The articles of incorporation define how many shares, or ownership portions, the corporation will issue as well as what types of stock the corporation will issue. A corporation that issues only one type of stock issues common shares, or common stock. Common shareholders have the right to vote and also the right to the corporation's net assets, also known as dividends. A corporation may designate different classes of common stock, with different voting and dividend rights for those shareholders. Preferred stock is a type of stock issued by corporations that in most cases do not grant the shareholder the right to vote. However, owners of preferred stock usually have greater rights to receive dividends than do owners of common stock.
The majority of states have adopted the Model Business Corporation Act (MBCA) as the basis of their own state laws, though each of these states has modified the provisions of the MBCA. The following lists the laws that govern corporations and indicates which government body provides general supervision over corporations.
ALABAMA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
ALASKA: The current Alaska Corporations Code was adopted in 1989.
ARIZONA: The state corporation statute is based on the MBCA. The Arizona Corporation Commission provides general supervision over corporations.
ARKANSAS: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
CALIFORNIA: The General Corporation Law has been in effect since 1977. The Secretary of State provides general supervision over corporations.
COLORADO: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
CONNECTICUT: The current version of the Connecticut Business Corporation Act was completed in 1997.
DELAWARE: The Delaware General Corporation Law applies to corporations. The Division of Corporations of the Secretary of State governs corporations.
DISTRICT OF COLUMBIA: The District of Columbia Business Corporation Act was adopted in 1954 and was based on the MBCA. In addition to the provision allowing for the general formation of corporations, Congress may form a corporation through the enactment of a special act.
FLORIDA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
GEORGIA: The state corporation statute is based on the MBCA. The Corporations Division of the Secretary of State provides general supervision over corporations.
HAWAII: The state corporation statute is based on the MBCA. The Director of the Department of Commerce and Consumer Affairs provides general supervision over corporations.
IDAHO: The state corporation statute is based on the MBCA.
ILLINOIS: The Illinois Business Corporation Act became effective on July 1984. The Secretary of State provides general supervision over corporations.
INDIANA: The state corporation statute is based on the MBCA.
IOWA: The Iowa Business Corporation Act became effective in 1989.
KANSAS: The state corporation statute is based on the Delaware General Corporation Law. The Secretary of State provides general supervision over corporations.
KENTUCKY: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
LOUISIANA: The Business Corporations Law was enacted in 1968. No government office provides general supervision, except that documents submitted by corporations are filed with the Secretary of State.
MAINE: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
MARYLAND: The state corporation statute is based on the MBCA. The State Department of Assessments and Taxation provides general supervision over corporations.
MASSACHUSETTS The state corporation statute is based on the MBCA. The Corporations Division of the Secretary of the Commonwealth provides general supervision over corporations.
MICHIGAN: The Michigan Business Corporation Act became effective on January 1, 1973. The Department of Labor and Economic Growth provides general supervision over corporations.
MINNESOTA: The Business Corporation Law became effective in 1981.
MISSISSIPPI: The state corporation statute is based on the MBCA. The Business Services Division of the Secretary of State's office provides general supervision over corporations.
MISSOURI: The Secretary of State provides general supervision over corporations.
MONTANA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
NEBRASKA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
NEVADA: The Secretary of State provides general supervision over corporations.
NEW HAMPSHIRE: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
NEW JERSEY: The current Corporations Act was adopted to become effective in 1969. The Secretary of State provides general supervision over corporations.
NEW MEXICO: The state corporation statute is based on the MBCA. The Public Regulation Commission provides general supervision over corporations.
NEW YORK: The Secretary of State provides general supervision over corporations.
NORTH CAROLINA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
NORTH DAKOTA: The state corporation statute is based partially on the MBCA. The Secretary of State provides general supervision over corporations.
OHIO: The Business Services Division of the Secretary of State provides general supervision over corporations.
OKLAHOMA: The Secretary of State provides general supervision over corporations.
OREGON: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
PENNSYLVANIA: The Business Corporation Law was enacted in 1988. The Department of State provides general supervision over corporations.
RHODE ISLAND: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
SOUTH CAROLINA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
SOUTH DAKOTA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
TENNESSEE: The Secretary of State provides general supervision over corporations.
TEXAS: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
UTAH: The state corporation statute is based on the MBCA. The Division of Corporations and Commercial Code of the Department of Commerce provides general supervision over corporations.
VERMONT: The Secretary of State provides general supervision over corporations.
VIRGINIA: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
WASHINGTON: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
WEST VIRGINIA: The Secretary of State provides general supervision over corporations.
WISCONSIN: The state corporation statute is based on the MBCA. The Department of Financial Institutions provides general supervision over corporations.
WYOMING: The state corporation statute is based on the MBCA. The Secretary of State provides general supervision over corporations.
Folk on the Delaware General Corporation Law. Rodman Ward, Jr., Edward P. Welch, and Andrew J. Turezyn, Aspen Law and Business, 1999.
Folk on the Delaware General Corporation Law. Rodman Ward, Jr., Edward P. Welch, and Andrew J. Turezyn, Aspen Law and Business, 1999.
Macey on Corporation Laws. Johnathan R. Macey, Aspen Publishers, 2005.
West's Encyclopedia of American Law, 2nd Edition. West Group, 2004.
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"Corporations." Gale Encyclopedia of Everyday Law. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/corporations-0
"Corporations." Gale Encyclopedia of Everyday Law. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/corporations-0
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The American colonies were familiar with corporations well before independence in 1776. Although they were banned in Britain in 1720, after the financial disaster caused by exuberant speculation in the South Sea Company's shares, corporations created prior to the restriction continued to exist in the colonies. Nor were the colonies subject to the same level of restrictions as in metropolitan Britain.
Colonies that were created as corporations themselves, such as the Bay Colony of Massachusetts (1629), were prohibited from creating corporations of their own. Royal assent was required before a charter became legal, and colonial legislatures refrained from seeking such approval until the middle of the eighteenth century. Most of these early charters did not create business enterprises but instead delimited jurisdictional boundaries by incorporating towns and counties, creating religious associations and parishes, and founding schools or charitable organizations.
The advantages conferred by an early corporate charter were fairly standard: it allowed a group to make a binding set of rules for its self-governance, to function as an individual "corporate" legal entity that could sue and be sued in a court, to exist "in perpetuity" beyond the lifetime of its members, and to limit its legal liabilities. These benefits allowed corporations to protect their aggregated property and survive from one generation to the next, something that was essential for a church, school, charity, town, or business.
The Revolution, hostile to relics of monarchy and stoked by rhetoric decrying privilege, placed corporations in tenuous circumstances. It resurrected old British and French anticorporate arguments, buttressing them with suggestions by the economist Adam Smith and the philosopher David Hume that corporations were economically inefficient and monopolistic creations used by aristocrats to gain unfair advantages over common entrepreneurs who did not enjoy the same kind of royal favoritism.
This concern was raised in post-Revolutionary debates about reincorporating cities whose charters were nullified at the moment of independence, and incorporating towns that had previously been denied charters by the Crown. The governments of Philadelphia, Boston, and New York City were all on legally unfamiliar footing after 1776: Philadelphia's 1701 charter had expired, Boston was seeking its first charter (it had been denied one before independence because Massachusetts was itself a corporation and lacked the power to incorporate on its own), and New York was still relying on its 1731 Montgomerie Charter to function as a wartime government in a city under British occupation.
Proposals to reincorporate cities were met with hostility by some who claimed that corporations had become incompatible with Revolutionary principles of popular sovereignty and republicanism. Corporations, these anticharter pamphleteers and legislators charged, created governments-within-governments, imperia in imperio, thereby guaranteeing a permanent state of conflict between corporate governments and state legislatures. Incorporated cities limited the pool of eligible electors by applying property eligibility requirements and granting certain land-owning citizens representation that was denied to landless laborers. In New York, for example, property requirements meant that a far smaller group of voters could vote in elections for the city's common council than could vote in state elections for governor and legislature. Not only did this diminish the value of work, anticharter critics charged, it echoed the political inequities that caused the Revolution in the first place.
states and corporations
Despite the often persuasive arguments of corporations' detractors, some state legislatures began exercising their right to incorporate soon after independence and the adoption of their own constitutions. Massachusetts created more than a hundred new corporations in the 1780s and twice as many in the 1790s.
States incorporated banks, insurance companies, bridges, canals, waterworks, turnpikes, manufacturing enterprises, mills, and harbor improvement projects, in addition to towns, schools, and charities. In some states these new types of corporations comprised nearly a quarter of all charters, performing functions that benefited the public but drew on private talent, knowledge, and wealth to accomplish their goals. During this time, the Massachusetts Medical Society (1781) was created to examine the qualifications of physicians and surgeons in the state, while the Beverly (Mass.) Cotton Manufactory (1789) was chartered to promote industrial enterprise. In New Jersey the Society for Useful Manufactures (1791) was created at the behest of U.S. Treasury Secretary Alexander Hamilton to advance American technology and industry, giving its members privileges such as exemptions from military service; its charter was so broad that the society was given the authority to found the city of Paterson.
States discovered that corporations were useful instruments to entice combinations of individuals to accomplish tasks that they could not achieve on their own or with their disaggregated wealth. Some states did not see an immediate need to create large numbers of corporations; Virginia relied on landowners to improve and manage the landscape longer than did New England or Middle Atlantic states. However, once the ambitions of internal improvement projects exceeded the wealth of such landowners, the state created corporations to fulfill those functions.
corporations and the law
That corporations were profitable did not typically dampen the enthusiasm of legislators, who might have seen them as conflicting with state government endeavors, for their creation. This was because corporations were intended to serve the public welfare. As corporate advocates noted, charters laid out the rules under which corporations were legally bound to operate. Thus, properly designed charters created mini-republics of voting shareholders who, instead of being in conflict with state governments and constitutions, reflected the ideals of republicanism and federalism. Regular elections, a separation of powers, and secured liberties could all be enshrined in a bill of incorporation. This outlook embraced anticharter views concerning the necessity of reconciling the corporate form to Revolutionary ideology, drawing on a fascination with constitution making that pervaded the U.S. Congress and stretched to state legislatures and corporate boards of directors.
Because Congress lacked the power to grant charters of incorporation under the Constitution (1787), the power rested with states. Over time, legislatures developed standardized legislative language for charters, ensuring that corporations behaved appropriately and could not become rogue governments-within-governments. The corporate form ensured that corporations were owned by shareholders who were eligible, on a regular basis, to elect directors to a board that acted as an executive committee. The board kept minutes of its meetings, correspondence, and expenditures, which it shared with its shareholders and the public.
The public nature of the corporation persisted throughout the period of the early Republic. Corporate law did not yet distinguish between public and private corporations, and even the most significant Supreme Court case of the period dealing with corporations, Dartmouth College v. Woodward (1819), did not absolve corporations from public duties, even if they were nominally "private" because their assets were derived from "private" sources.
Davis, Joseph Stancliffe. Essays in the Earlier History of American Corporations. 2 vols. Cambridge, Mass.: Harvard University Press, 1917.
Hartog, Hendrik. Public Property and Private Power: The Corporation of the City of New York in American Law, 1730–1870. Chapel Hill: University of North Carolina Press, 1983; Ithaca, N.Y.: Cornell University Press, 1989.
Hartz, Louis. Economic Policy and Democratic Thought: Pennsylvania, 1776–1860. Cambridge, Mass.: Harvard University Press, 1948.
Maier, Pauline. "The Revolutionary Origins of the American Corporation." William and Mary Quarterly, 3rd ser., 50, no. 1 (Jan. 1993): 51–84.
Seavoy, Ronald E. The Origins of the American Business Corporation, 1784–1855: Broadening the Concept of Public Service during Industrialization. Westport, Conn.: Greenwood Press, 1982.
Brian Phillips Murphy
"Corporations." Encyclopedia of the New American Nation. . Encyclopedia.com. (January 16, 2019). https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/corporations-0
"Corporations." Encyclopedia of the New American Nation. . Retrieved January 16, 2019 from Encyclopedia.com: https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/corporations-0