“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. It has neither a mind nor a body of its own” – Explain and Illustrate
A corporation is called a legal person or a legal entity. It may also be called a child of the state, since its birth, existence and termination are regulated by statutory law. Upon the completion of certain requirements a state will grant a charter of incorporation which is in effect a birth certificate for the corporation.1 The corporation must abide by the specific statutory law during its existence, and if the corporation is to be terminated, then the termination must comply with the statutory law. Each state has specific statutes governing the creation, regulation and termination of corporation and also regulating corporations created in other states but doing local business in that state.
Most states follow the Model Business Corporation Act (MBCA) or the Revised MBCA (RMBCA) that are model corporation laws.
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.2 However, in certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.
In 1886 the U.S. Supreme Court established that under the law corporations were “persons” and gave them the same rights as human beings. But a corporation exists only on paper. It is simply a legal creation that allows a group of people to engage in activities as a single entity. In order to make it easy for a corporation to do business, the law says that it is an “artificial person.” As a result, corporations have the same rights as people to free speech, due process, equal protection—and more. But a corporation is not like a human being. Unlike people, it can live forever. It does not need clean air to breathe or safe water to drink. It cannot feel pain or joy. It can be many places at once.
1 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 819, para. 1
2 Clarkson, Miller, Jentz, Cross, West’s Business Law, (Ninth Ed.)
If it commits a crime, it cannot go to prison. Because of these and many other advantages, corporations have been able to accumulate enormous wealth and power.
The Supreme Court heard a case called Santa Clara County v. Southern Pacific Railroad Company. The judges said that the Fourteenth Amendment, which was ratified in 1868 to ensure the citizenship rights of the newly freed slaves, should also apply to corporations.3 They gave no explanation of how an amendment about former slaves had converted corporate entities into the legal equivalent of human beings. Nonetheless, corporations have been protected under law as “persons” ever since.
In the following years, through other Supreme Court cases, corporations gained most Bill of Rights protections, including the right to due process, freedom from unwarranted search and seizure, and freedom of the press and speech. Armed with legal personhood status, plus unlimited life spans and limited liability, corporations have become like superhumans with the advantages. In fact, corporations have more rights under the law than human beings.
C. Corporation as person and citizen
a. The corporation is, by definition, a legal person. As such, it enjoys the same constitutional protections as human persons. Under the Fifth Amendment, its life, liberty and property cannot be taken, without due process of law, by the national government or any of its agencies.4 Under the Fourteenth Amendment of US constitution, the same due process protection, exists against the state governments. Likewise, states cannot deny corporate persons the equal protection of the law.5
b. Corporations are not considered citizens for the purpose of Fourteenth amendment of U.S constitution “privileges and immunities of citizenship.” Most obviously, this means that corporations cannot vote in political elections, hold political office, or serve on juries.
3 http://www.jashford.com/Pages/WhyDoCorps.pdf [Accessed March 30, 2011]
4 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 824, para. 2
5 Equal here does not mean identical. It only means that distinctions must have a rational basis; arbitrary, invidious discrimination against corporations is prohibited.
More important, corporations do not have citizen’s rights to conduct business in states other than the domicile state. 6 Corporations wishing to do local business in a second state must secure that state’s permission to do so; human persons, as citizens, are exempt from this requirement.
c. A corporation is considered to be a “citizen” of its state of incorporation. Court has also recognized that a corporation may acquire a kind of “double citizenship” in the state where it has its principal place of business. 7
D. Separate Corporate Entity
a. Valid Organization: Once a corporation has been successfully organized, it is recognized as a separate and distinct legal person or entity. It owns its own property, makes its own contracts, and pays its own taxes.8 So long as a corporation’s separate identity is preserved by the persons who operate the corporation, that identity should be respected and upheld by the courts and other agencies of government. The fact that all of a corporation’s stock is held by only a few persons is not, in itself, a basis for disregarding the separate corporate entity. A court should take this drastic step only where the corporation is being used to produce illegal or fraudulent results or where its human operators are themselves disregarding its existence. Severe under-capitalization of the new corporation may lead a court to infer fraud on the part of its organizers.
b. Regulatory Exceptions: Some regulatory and taxation statutes permit enforcement agencies to impose liability on other persons for acts by a corporation.9 Although this is not quite the same as piercing the corporate veil, in effect separate corporate entity is disregarded.
E. Corporate Rights
Corporations enjoy several notable rights under the law that can make them an attractive form of ownership.
6 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 824, para. 3
7 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 824, para. 4
8 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 828, para. 3
9 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 828, para. 4
a. Limited Liability: One of the most important aspects of corporations is that they are considered legal “persons” separate from any single individual. This means that owners (shareholders) are not legally liable for the debts that a corporation accrues. Under sole proprietorships and partnerships, owners are fully liable for debts, so if a business fails, the owners may have to pay for the debts of the business out of their own pockets. The shareholders of a corporation generally only have liability up to the value of their investment.10 If a corporation goes bankrupt, shareholder’s shares might be worthless, but they do not have to pay for the corporation’s debts out of their own pockets.
b. Lawsuits: Since corporations are considered legal persons, they may be sued or file lawsuits against others. This allows corporations to protect their intellectual property, such as trademarks and patents. According to Cornell University Law School, shareholders also have the right to sue corporations. Shareholders are not personally liable for damages awarded against corporations in lawsuits.
c. Taxation: Corporations are subject to a variety of special tax laws, some of which can be advantageous. The Internal Revenue Service (IRS) states that corporations must pay taxes on profits at the time that they are earned and taxes are also payable on dividends distributed to shareholders. Corporations may deduct a variety of business expenses from their tax obligations, such as startup expenses, operating expenses, advertising costs, salaries and bonuses paid to employees and the cost of medical benefits and retirement plans.
d. Life Span: Another right granted to corporations by virtue of the fact that they are legal entities separate from any individual person is that they can live forever. With sole proprietorships and partnerships, the business ends if the owner or owners die. With corporations, deaths of managers or shareholders do not affect the life of the business; ownership is freely transferable simply by buying or selling shares of stock.
10 http://topics.law.cornell.edu/wex/corporations [Accessed March 31, 2011]
F. Corporate Powers
a. Powers given to all corporations: Since the corporation is a creature of the law, it possesses only those powers given to it by the law.11 It can do those things it has been authorized to do.
i. Inherent Powers: Powers that results from the corporation’s existence as a legal person, such as the power to sue and be sued in its corporate name and the power to hold and convey property is called inherent powers.
ii. Statutory Powers: These powers and others specifically stated in the corporation statute are also referred to as statutory powers.
iii. Express Powers: The powers specifically granted to a particular corporation by its charter are called express power. Many states permit such powers to be stated very broadly-for example, “to conduct any lawful business which may be conducted by corporations in this state.”
iv. Implied Powers: The powers that are necessary and appropriate to help carry out their express powers. Where a corporation has not used a very broad statement of its express powers, litigation may occur over whether a particular corporate activity is or is not within its implied powers.
b. Acts beyond powers given: Acts that do not fall within one of the above categories are said to be ultra vires, ”outside” the corporation’s powers.12 Courts have not agreed as to what should happen when a corporation engages in such unauthorized activity. The modern tendency is to severely limit such challenges to corporate acts. If a contract has been fully performed by both the parties, neither party can raise the ultra vires claim so as to force rescission. If a contract is completely executor, neither party can sue for enforcement. Where only one party has performed, the courts disagree on what should happen; most courts permit the party that has performed to enforce the contract. In any case, the state should be able to enjoin the performance of unauthorized acts; a shareholder should be able to sue for an injunction and damages, and the corporation itself should be able to collect damages against the directors and officers who were responsible for the violation of the charter.
11 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 830, para. 7
12 Phillip J. Scaletta, Jr., George D. Cameron III, Foundations of Business Law, (second ed.) page 831, para. 4
G. Corporate Liabilities
Corporations do have some liabilities apart from enjoying rights and powers given by law as “artificial person”.
a. Liability for tort: A corporation, being an artificial person and impersonal, cannot personally commit a tort. But a corporation is liable for the torts of its agents committed in the pursuit of the corporate business, under the laws applicable to principal and agent. Although a corporation has no authority to act outside of the statute creating it or its charter, it has the capacity through its agents to do acts which may cause injury to others; therefore, it is liable for every wrong committed, even though the injury arises out of an act which is ultra vires.13 A few courts hold, however, that a corporation is not liable for the torts of its employees in ultra vires transactions, even if it has authorized the ultra vires act but the weight of authority is otherwise. A corporation is liable for fraud committed by its officers or agents within the scope of their authority. It is also liable if the act is apparently within the general authority of the agents. Corporations are not only liable for acts committed by their agents in the pursuit of the corporate business, but they are likewise liable for injury caused by their agent’s omitting to perform duties of the corporation. A corporation is liable for the negligence of an agent in failing to keep its property in safe condition.
b. Liability for crimes: A corporation cannot commit crimes which involve intent or personal violence. However, a corporation may be criminally liable for the violation of a law which imposes a duty upon the corporation to do, or not to do, an act. For example, a corporation may be fined for failure to comply with some statute which specifies certain things to be done by the corporation such as supplying protection for employees and making reports and for the violation of regulatory statutes under the police power of the state. A corporation may be indicted for improperly performing an act which it may lawfully do. For example, a corporation may be indicted for conducting a perfectly legal business in such a manner as to be guilty of maintaining a nuisance. Corporations cannot be held liable for criminal acts involving personal violence, but may be held criminally responsible for failure to comply with statutes which have prohibited certain acts. Corporations have been criminally liable for unlawful conspiracies to restrain trade, for knowingly and fraudulently concealing property under the Bankruptcy Act, and for giving rebates to shippers in violation of federal statutes.
13 Chamberlain v. Southern California Edison Company, 1914, 167 Cal. 500, 140 Pac. 25; p. 700.
Corporations may also be held for contempt of court by reason of acts or omissions of their agents, where they have violated an injunction. The court may punish such corporations by the levy of a fine, the same as against a natural person.
The law treats a corporation as a legal “person” that has standing to sue and be sued, distinct from its stockholders. The legal independence of a corporation prevents shareholders from being personally liable for corporate debts. It also allows stockholders to sue the corporation through a derivative suit and makes ownership in the company (shares) easily transferable. The legal “person” status of corporations gives the business perpetual life; deaths of officials or stockholders do not alter the corporation’s structure.
Corporations are taxable entities that fall under a different scheme from individuals. Although corporations have a “double tax” problem – both corporate profits and shareholder dividends are taxed. Corporate profits are taxed at a lower rate than the rates for individuals.
14 http://topics.law.cornell.edu/wex/corporations [Accessed April 2, 2011]
Scaletta P. J., Cameron G.D. III, Foundations of Business Law, (second ed.) BPI Irwin, Boston: United States
Clarkson, Miller, Jentz, Cross, West’s Business Law, (Ninth Ed.) Thomson Learning, Andover: United Kingdom
http://www.jashford.com/Pages/WhyDoCorps.pdf [Accessed March 30, 2011]
Chamberlain v. Southern California Edison Company, 1914, 167 Cal. 500, 140 Pac. 25; p. 700.
http://topics.law.cornell.edu/wex/corporations [Accessed April 2, 2011]
http://www.ehow.co.uk/info_7983928_corporations-rights-under-law.html [Accessed March 26, 2011]
http://www.jstor.org/pss/1117773 [Accessed March 29, 2011]
CA Cooke, Corporation, Trust and Company: A Legal History, (1950)
S Guterman, The Principle of the Personality of Law in the Germanic Kingdoms of Western Europe from the Fifth to the Eleventh Century (1990)
http://www.luc.edu/law/activities/publications/lljdocs/vol37_no1/krannich.pdf [Accessed April 3, 2011]