Positive emotions lead towards negative outcomes

Introduction

A corporation is a legal entity that is created under the laws of a State designed to establish the entity as a separate legal entity having its own privileges and liabilities distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter and many of these chartered companies still exist. Most jurisdictions now allow the creation of a new corporation through registration. 1

Corporations exist strictly as a product of the corporate law.

An important (but not universal) contemporary 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, and they can themselves be responsible for human rights violations. Corporations are conceptually immortal but 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, but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such as fraud and manslaughter. 2

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1.        Bishop Hunt, The Development of the Business Corporation in England (1936)

2.        Blumberg, Phillip I., The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993)

Corporate mapping

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. 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. 3

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 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. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. 4

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3.        Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.

4.         Bruce Brown, The History of the Corporation (2003)

Corporate law

The existence of a corporation requires a special legal framework and body of law that specifically grants the corporation legal personality, and typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person). Corporate statutes typically empower corporations to own property, sign binding contracts, and pay taxes in a capacity separate from that of its shareholders (who are sometimes referred to as “members”). According to Lord Chancellor Haldane.5

A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.5

The legal personality has two economic implications. First it grants creditors (as opposed to shareholders or employees) priority over the corporate assets upon liquidation. Second, corporate assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law.6

Ownership and control

Persons and other legal entities composed of persons (such as trusts and other corporations) can have the right to vote or receive dividends once declared by the board of directors. In the case of for-profit corporations, these voters hold shares of stock and are thus called shareholders or stockholders. When no stockholders exist, a corporation may exist as a non-stock corporation (in the United Kingdom, a “company limited by guarantee”) and instead of having stockholders, the corporation has members who have the right to vote on its operations.

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5. C. A. Cooke, Corporation, Trust and Company: A Legal History, (1950)

6. Charles Freedman, Joint-stock Enterprise in France, : From Privileged Company to Modern Corporation (197

Voting members are not the only members of a “Corporation”. The members of a non-stock corporation are identified in the Articles of Incorporation (UK equivalent: Articles of Association) and the titles of the member classes may include “Trustee,” “Active,” “Associate,” and/or “Honorary.” However, each of these listed in the Articles of Incorporation are members of the Corporation. The Articles of Incorporation may define the “Corporation” by another name, such as “The ABC Club, Inc.” and, in which case, the “Corporation” and “The ABC Club, Inc.” or just “The Club” are considered synonymous and interchangeable as they may appear elsewhere in the Articles of Incorporation or the By-Laws. If the non-stock corporation is not operated for profit, it is called a not-for-profit corporation. 7

There are two broad classes of corporate governance forms in the world. In most of the world, control of the corporation is determined by a board of directors which is elected by the shareholders. In some jurisdictions, such as Germany, the control of the corporation is divided into two tiers with a supervisory board which elects a managing board. Germany is also unique in having a system known as co-determination in which half of the supervisory board consists of representatives of the employees. The CEO, president, treasurer, and other titled officers are usually chosen by the board to manage the affairs of the corporation.8

In addition to the limited influence of shareholders, corporations can be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a controlling interest analogous to that of a member, including one or more seats on the board of directors. In some jurisdictions, such as Germany and Japan, it is standard for banks to own shares in corporations whereas in other jurisdictions such as the United States, under the Glass–Steagall Act of 1933, and the United Kingdom, under the Bank of England, banks are prohibited from owning shares in external corporations.

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7. Conard, Alfred F. Corporations in Perspective. 1976.

8. Dignam, A and Lowry, J (2006) Company Law, Oxford University Press ISBN 978-0-19-928936-3

The regulations most favorable to incorporation include:

Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have “limited” liability for the corporation’s debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. This enables corporations to “socialize their costs” for the primary benefit of shareholders; to socialize a cost is to spread it to society in general. The economic rationale for this is that it allows anonymous trading in the shares of the corporation, by eliminating the corporation’s creditors as a stakeholder in such a transaction. Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller. Limited liability further allows corporations to raise large amounts of finance for their enterprises by combining funds from many owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This increases the attraction to potential shareholders, and thus increases both the number of willing shareholders and the amount they are likely to invest. However, some jurisdictions also permit another type of corporation, in which shareholders’ liability is unlimited, for example the unlimited liability corporation in two provinces of Canada, and the unlimited company in the United Kingdom.
Another advantage is that the assets and structure of the corporation may continue beyond the lifetimes of its shareholders and bondholders. This allows stability and the accumulation of capital, which is thus available for investment in larger and longer-lasting projects than if the corporate assets were subject to dissolution and distribution. This was also important in medieval times, when land donated to the Church (a corporation) would not generate the feudal fees that a lord could claim upon a landholder’s death. In this regard, see Statute of Mortmain.

Formation

Historically, corporations were created by a charter granted by government. Today, corporations are usually registered with the state, province, or national government and regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation’s assumption of limited liability. The law sometimes requires the corporation to designate its principal address, as well as a registered agent (a person or company designated to receive legal service of process). It may also be required to designate an agent or other legal representative of the corporation.

Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation’s directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.

The law of the jurisdiction in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.

Financial disclosure

In many jurisdictions, corporations whose shareholders benefit from limited liability are required to publish annual financial statements and other data, so that creditors who do business with the corporation are able to assess the creditworthiness of the corporation and cannot enforce claims against shareholders. Shareholders therefore sacrifice some loss of privacy in return for limited liability. This requirement generally applies in Europe, but not in Anglo-American jurisdictions, except for publicly traded corporations, where financial disclosure is required for investor protection.

Unresolved issues

The nature of the corporation continues to evolve in response to new situations as existing corporations promote new ideas and structures, the courts respond, and governments issue new regulations. A question of long standing is that of diffused responsibility. For example, if a corporation is found liable for a death, how should culpability and punishment for it be allocated among shareholders, directors, management and staff, and the corporation itself? See corporate liability, and specifically, corporate manslaughter.

The law differs among jurisdictions, and is in a state of flux. Some argue that shareholders should be ultimately responsible in such circumstances, forcing them to consider issues other than profit when investing, but a corporation may have millions of small shareholders who know nothing about its business activities. Moreover, traders — especially hedge funds — may turn over shares in corporations many times a day. The issue of corporate repeat offenders (see H. Glasbeak, “Wealth by Stealth: Corporate Crime, Corporate Law, and the Perversion of Democracy”, ISBN 978-1896357416, Between the Lines Press: Toronto 2002) raises the question of the so-called “death penalty for corporations.”

Corporate taxation

In many countries corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as “double taxation“, because any profits distributed to shareholders will eventually be taxed twice. One solution to this (as in the case of the Australian and UK tax systems) is for the recipient of the dividend to be entitled to a tax credit which addresses the fact that the profits represented by the dividend have already been taxed. The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend. In other systems, dividends are taxed at a lower rate than other income (e.g. in the US) or shareholders are taxed directly on the corporation’s profits and dividends are not taxed (e.g. S corporations in the US).

Other business entities

Almost every recognized type of organization carries out some economic activities (e.g. the family). Other organizations that may carry out activities that are generally considered to be business exist under the laws of various countries. These include:

Conclusion

An important (but not universal) contemporary 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.

References

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