A corporation is an association recognized by civil law and regarded in all ordinary transactions as an individual. It is an artificial person. Chief Justice Marshall of the Supreme Court of the United States of America defined the term corporation: “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, individuality; properties by which a perpetual succession of many persons are considered as the same, and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity of perpetual conveyances for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with qualities and capacities, that corporations were invented, and are in use. By these means, perpetual successions of individuals are capable of acting for the promotion of the particular object, like one immortal being.”
By law, a corporation is an independent entity, a “person.” It has life of its own, separate and apart from its owners, officers and employees.1 Unlike a partnership, its life does not depend on the existence of any individual or group. If a corporation’s sole owner dies, no dissolution occurs. The corporation’s life continues.
B. Background of Corporation
The conception and economic reality of the corporate entity was radically different from that which exists today. Commentators originally viewed corporations as “artificial persons,” created by the state, with only those powers given to them by the state.2
1. Clark, L.S., Kinder, P.D, Hotchkiss, C. Law and Business, Page373, paragraph 3
2. William Blackstone, COMMENTARIES ON THE LAWS OF ENGLAND, Page. 475–76 (1st ed. Oxford, Clarendon Press 1765)
At the pleasure of the state, and the state reserved the power to modify any of the rights granted to them, or even to remove their charter entirely.3 Corporations at this time existed only for the public good—to accomplish the public purposes for which they were created. Moreover, because corporations were creatures of the state, they existed under this view, a corporation was a legal fiction, an artificial entity.4
The economic and social position of corporations during the early nineteenth century was also vastly different from today. During the early nineteenth century, business corporations were few and far between; “business was generally conducted by single proprietorships or partnerships rather than corporations.” This continued to be true throughout most of the nineteenth century. Corporations did not overtake partnerships as the most common method of doing business until nearly the turn of the century.5 Because corporations were radically different economic and social actors, they did not invoke the “revolutionary republican fear of concentrated power and skepticism about the utility of large institutions” that many citizens held after the Revolutionary War. As a result, “very little tension arose between economic practice and individualist economic and legal theory in the early nineteenth century.”
The first state to adopt a general corporation law providing for standard procedures for incorporation was New York in 1811.6
C. The veil of incorporation
It was established in Salomon v. Salomon & Co. Ltd., ante, that a registered company is a legal person separate from its members. This principal may be referred to as “the veil of incorporation.”7 In general, the law will not go behind the separate personality of the company to the members, so that it was held that the largest shareholder had no insurable interest in the property of the company. Similarly, an employee cannot bring an action for unfair dismissal against the majority shareholder of a company which employed him.
3. Michael D. Rivard, Comment toward a General Theory of Constitutional Personhood: A Theory of Constitutional Personhood for Transgenic Humanoid Species, p. 1425, 1456 (1992)
4. Blumberg, supra note 19, at 292. See also William W. Bratton, Jr., The New Economic Theory of the Firm: Critical Perspectives from History, p. 1471, 1484 (1989)
5. Indicating that the change in the role of the corporation at the end of the nineteenth century was due, in part, to state support for economic development
6. Behr, B.E., Study Guide to Accompany West’s Business Law, fifth ed., P.466, paragraph 1 (bullet 4)
7. Morse G., Company Law (thirteenth ed.), p. 27, paragraph 2
D. Unique Nature of Corporations as an “artificial being”
Corporate powers are expressly provided for in general corporation statutes and corporate charters (articles, or certificates, of incorporation) and generally, are quite broad. In theory, a corporation is owned by and for the benefit of its shareholders. Managerial policies, however, are determined by the board of directors, elected by the shareholders.8
A corporation has detached accountability. It has its own rights, privileges, and liabilities distinct from those of its members or individual owners.9 A corporation exists in the eyes of law as a person, separate and distinct from the persons who own the corporation (stockholders). A corporation is treated as a person under the due process clause, which states that Corporation may sue and be sued; corporation is protected against unreasonable searches and seizures and double jeopardy.10 A corporation is regarded as a citizen of the state in which it was incorporated for purposes of jurisdiction, but not necessarily entitled to all the privileges and immunities of citizens.
E. Corporation as a Legal Person
Once the articles of association are filed, the corporation exists as a distinct legal person endowed with its own powers. The property owned by the corporation is not the property of stockholders, its managers, or its directors, but is owned by the corporation in the corporate name. This separate and distinct legal entity status provides the stockholders with limited liability.
F. Characteristics of the corporate entity
These are the few characteristics of corporations11:
a) The corporation is an artificial person, which has authority to conduct business and incur liability in its own name.
8. Behr, B.E., Study Guide to Accompany West’s Business Law, fifth ed., P.465, paragraph 3
9. http://www.lectlaw.com/articles/at0225.htm [Retrieved April 1, 2011]
10. Behr, B.E., Study Guide to Accompany West’s Business Law, fifth ed., P.466, paragraph 2
11. Behr, B.E., Study Guide to Accompany West’s Business Law, fifth ed., P.467, paragraph1
b) The corporation is separate and apart from shareholders who own it, the board of directors, and its officers, managers and employees.
c) A corporation is distinguishable from a partnership in following aspects:
i. The shareholders do not represent the corporation and are not personally liable for corporate debts; the corporation is not liable for the debts of shareholders.
ii. Each shareholders liability is limited to the amount of his or her investment.
iii. The body of shareholders changes without affecting the continued existence of the corporation; the death of the shareholder or the transfer of a shareholder’s interest to another person does not cause the dissolution of the corporation.
iv. A shareholder can deal with the corporation with an arm’s length transaction; a shareholder can sue and can be sued by the corporation and under circumstances, a shareholder can sue another person on behalf of the corporation in a shareholder’s derivative suit.
d) Distributed and retained profits of corporations are taxed by the state and the federal government.
G. Corporation’s Powers
Powers refer to the corporation’s authority or right to act under the law, its articles of association, and its bylaws.
Types of Powers
A corporation has express and implied powers. Normally these powers are as broad as the law permits, but occasionally they are restricted.12
a) Express Powers: Express powers are those which the articles of incorporation grant to the corporation. The articles state the corporation’s objectives. The articles may grant all the powers the law permits a corporation to exercise.
b) Implied Powers: In addition to its express powers, a corporation has implied powers to perform any acts reasonably necessary to fulfill the corporation’s objectives. Of course, what the corporation does must be legal and must not be prohibited by its articles or bylaws.13
12. Clark, L.S., Kinder, P.D, Hotchkiss, C. Law and Business, Page391, paragraph 3
13. Clark, L.S., Kinder, P.D, Hotchkiss, C. Law and Business, Page392, paragraph 1
For instance, a corporation may:
ü Hold, lease, own or transfer real or personal property
ü Lend money and use its credit to assist its employees
ü Own stocks or bonds of any other corporation or government entity
ü Borrow, pledging any or all corporate assets, or lend money for any corporate purpose
c) Ultra Vires Transactions: The law terms unauthorized corporate transactions ultra vires, A Latin phrase meaning “beyond the powers.” Ultra vires transactions are of two types: those which exceed the corporation’s powers and those which are contrary to law. An ultra vires act does not have to be illegal, though; and what may be within the powers of one corporation may not be ultra vires for another.
There are limitations to the legal recognition of legal persons. Legal entities cannot marry, they usually cannot vote or hold public office, 14 and in most jurisdictions there are certain positions which they cannot occupy.15
The extent to which a legal entity can commit a crime varies from country to country. Certain countries prohibit a legal entity from holding human rights; other countries permit artificial persons to enjoy certain protections from the state that are traditionally described as human rights.16
Special rules apply to legal persons in relation to the law of defamation. Defamation is the area of law in which a person’s reputation has been unlawfully damaged. This is considered an ill in itself in regard to natural person, but a legal person is required to show actual or likely monetary loss before a suit for defamation will succeed.17
14. In Hong Kong, artificial persons are granted the right to vote in functional constituencies elections.
15. These restrictions vary from country to country. Some countries do not permit a corporate entity to be a director or a liquidator while others do.
16 Most commonly in the area of taxation and in relation to search warrants.
17 New Zealand Defamation Act 1992, s 6.
I. Liability of Corporations
One consequence of the concept of a corporation’s separate personality is that it can be liable for breaches of contract, torts, crimes etc. But for obvious reasons it can only act through human agents or employees, so that, as a general principal, a corporation can only be liable either where a principal would be liable for the acts of an agent or an employer liable for the acts of an employee.18
A corporation may be prosecuted for a crime for which the penalty imposed is fine.19
J. Retaining Corporate Status
Corporations and their owners must observe certain formalities to retain the corporation’s status as a separate entity.20 specifically, corporations must:
ü hold annual shareholders’ and directors’ meetings
ü keep minutes of shareholders’ and directors’ major decisions
ü make sure that corporate officers and directors sign documents in the name of the corporation
ü maintain separate bank accounts from their owners
ü keep detailed financial records, and
ü File a separate corporate income tax return.
18. Morse G., Company Law (thirteenth ed.), p. 27, paragraph 2
19. Behr, B.E., Study Guide to Accompany West’s Business Law, fifth ed., P.466, last paragraph
20 http://www.nolo.com/legal-encyclopedia/corporation-basics-29867.html [Retrieved March 31, 2011]
The Corporation comes from the Latin word corpus, meaning a body. Corporation is a creature of statute, an artificial “person.” The corporation substitutes itself for the natural persons in conducting corporate business and incurring liability, but its authority and liability are separate and apart from the shareholders. As an artificial “person” corporation has some rights, which includes Equal protection; Access to the courts, can sue and be sued; Right to due process before denial of life, liability or property; Freedom from unreasonable search and seizure and double jeopardy; Freedom of speech. Along with rights corporations have some liabilities. A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondent superior. Corporation can be liable for criminal acts, but only fined. In this case, responsible officers may go to prison.
The principal characteristic of a corporation at common law was that it was vested with the privilege of perpetuity, that is, it was said to have perpetual succession. At the present time in the greater number of American States the general legislation providing for the creation, of corporations expressly designates a fixed term during which a corporation may exist. The second of the original powers of corporations which is still maintained, is to sue or to be sued, implead, or to be impleaded, grant or receive, by its corporate name and to do all other acts as natural persons may. The third privilege was to purchase lands and to hold them for the benefit of the members of the corporation and their successors. The fourth original power possessed by corporations was that of having a common seal. A corporation, being an invisible body, cannot manifest its intentions by any personal act or by speech, and therefore can act and speak only by its common seal.
Clark, L.S., Kinder, P.D, Hotchkiss, C., Law and Business (1991) McGraw-Hill, New York: United States
Michael D. R, Comment toward a General Theory of Constitutional Personhood: A Theory of Constitutional Personhood for Transgenic Humanoid Species (1992)
http://www.jstor.org/pss/1117773 [retrieved March 29, 2011]
Behr, B.E., Study Guide to Accompany West’s Business Law, (1992) fifth ed. , West Publishing Company, St Paul: United States
Morse G., Company Law (1987), thirteenth ed., Richard Clay Ltd. Suffolk: Great Britain
http://www.irs.gov/businesses/small/article/0,,id=98240,00.html [retrieved April 1, 2011]
http://topics.law.cornell.edu/wex/corporations [Retrieved March 31, 2011]
Blackstone, W., COMMENTARIES ON THE LAWS OF ENGLAND
http://www.lectlaw.com/articles/at0225.htm [Retrieved April 1, 2011]
New Zealand Defamation Act 1992, s 6
http://www.nolo.com/legal-encyclopedia/corporation-basics-29867.html [Retrieved March 31, 2011]
http://www.luc.edu/law/activities/publications/lljdocs/vol37_no1/krannich.pdf [retrieved April 3, 2011]
http://www.ehow.co.uk/info_7983928_corporations-rights-under-law.html [Retrieved April 4, 2011]
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