corporation

This article is about business corporations. For other uses, see Corporation (disambiguation).

A corporation is a formal business association with a publicly registered charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members.[1] There are many different forms of corporations, most of which are used to conduct business.

Corporations exist as a product of corporate law, and their rules balance the interests of the management who operate the corporation, creditors, shareholders, and employees who contribute their labour.[2]

An important (but not universal) feature of a corporation is limited liability. If a corporation fails, shareholders normally only stand to lose their investment, and employees will lose their jobs, but neither will be further liable for debts that remain owing to the corporation's creditors.

Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons ("people"). Corporations can exercise human rights against real individuals and the state,[3] and they are often responsible for human rights violations.[4] Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they are "dissolved" either by statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate 'death', when creditors force the liquidation and dissolution of the corporation under court order,[5] but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such as fraud and manslaughter.[6]

Although corporate law varies in different jurisdictions, there are four core characteristics of the business corporation:[7]

History

The word "corporation" derives from corpus, the Latin word for body, or a "body of people." Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India.[8] In medieval Europe, churches became incorporated, as did local governments, such as the Pope and the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson's Bay Company, and these corporations came to play a large part in the history of corporate colonialism.

During the time of colonial expansion in the 17th century, the true progenitors of the modern Corporation emerged as the "chartered company". Acting under a charter sanctioned by the Dutch monarch, the Dutch East India Company (VOC), defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company's royal charter.[9] In the late 18th century, Stewart Kyd, the author of the first treatise on corporate law in English, defined a corporation as,

a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.
—[10]

Mercantilism

Labeled by both contemporaries and historians as "the grandest society of merchants in the universe", the British East India Company would come to symbolize the dazzlingly rich potential of the corporation, as well as new methods of business that could be both brutal and exploitive.[11] On 31 December 1600, the English monarchy granted the company a fifteen-year monopoly on trade to and from the East Indies and Africa. By 1611, shareholders in the East India Company were earning an almost 150% return on their investment. Subsequent stock offerings demonstrated just how lucrative the Company had become. Its first stock offering in 1613-1616 raised ₤418,000, and its first offering in 1617-1622 raised ₤1.6 million.[12]

In the United States, government chartering began to fall out of vogue in the mid-19th century. Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the greater corporate registration revenues available by providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state.[13] Delaware followed, and soon became known as the most corporation-friendly state in the country after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realized, but by then it was too late; even today, most major public corporations in the United States are set up under Delaware law.

By the beginning of the 19th century, government policy on both sides of the Atlantic began to change, reflecting the growing popularity of the proposition that corporations were riding the economic wave of the future. In 1819, the U.S. Supreme Court granted corporations a plethora of rights they had not previously recognized or enjoyed.[14] Corporate charters were deemed "inviolable", and not subject to arbitrary amendment or abolition by state governments.[15] The Corporation as a whole was labeled an "artificial person," possessing both individuality and immortality.[16]

At around the same time, British legislation was similarly freeing the corporation from historical restrictions. In 1844 the British Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter or an Act of Parliament.[17] Ten years later, limited liability, the key provision of modern corporate law, passed into English law: in response to increasing pressure from newly emerging capital interests, Parliament passed the Limited Liability Act of 1855, which established the principle that any corporation could enjoy limited legal liability on both contract and tort claims simply by registering as a "limited" company with the appropriate government agency.[18]

This prompted the English periodical The Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated."[19] The glaring inaccuracy of the second part of this judgment was recognized by the same magazine more than 75 years later, when it claimed that, "[t]he economic historian of the future . . . may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution."[20]

Modern corporations

By the end of the 19th century the Sherman Act, New Jersey allowing holding companies, and mergers resulted in larger corporations with dispersed shareholders. (See The Modern Corporation and Private Property [21] The well-known Santa Clara County v. Southern Pacific Railroad decision began to influence policymaking and the modern corporate era had begun.

The 20th century saw a proliferation of enabling law across the world, which helped to drive economic booms in many countries before and after World War I. Starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly owned services and enterprises to corporations. Deregulation (reducing the regulation of corporate activity) often accompanied privatization as part of a laissez-faire policy. Another major postwar shift was toward the development of conglomerates, in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. [22]