“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.
Ans: A corporation is a legal entity that is created under the laws of a State designed to establish the entity. It has a separate legal entity of 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. Most jurisdictions now allow the creation of a new corporation through registration. An important contemporary feature of a corporation is limited liability.[1]
Corporations can exercise human rights against real individuals and the state and they can themselves be responsible for human rights violations.[2] 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[3] but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such as fraud and manslaughter.
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. Corporate statutes typically empower corporations to own property, sign binding contracts, and pay taxes in a capacity separate from that of its shareholders.
According to Lord Chancellor Haldon, “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”.[4]
Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade. A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.
The legal personality has two economic implications. First it grants creditors 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.[5]
The government is, then similar to a corporation. The government has vested interest in protecting the rights of the people it serves. Corporations are in the business to be of public service. Corporations rely upon its charter to protect not only itself but also the people it serves. The same situation exists for the congress. Marshall continues to explain further that a legislative law is a contract and thus as a contract it cannot be broken.
The best recent definition is probably the following:
“A corporation is a collection of natural persons, joined together by their voluntary action or by legal compulsion, by or under the authority of an act of the legislature, consisting either of a special charter, or of a general permissive statute, to accomplish some purpose, pecuniary, ideal, or governmental, authorized, by the charter or governing statute, under a scheme of organization, and by methods thereby prescribed or permitted; with the faculty of having a continuous succession during the period prescribed by the legislature for its existence, of having a corporate name by which it may make and take contracts, and sue and be sued, and with the faculty of acting as a unit in respect of all matters within the scope of the purposes for which it is created.”[6]
Ten Attributes of a Corporation:
- It is a separate legal entity, separate and apart from its owner(s) (shareholder(s)).
- In a widely quoted definition, Chief Justice John Marshall in 1819 described a corporation as “an artificial being, invisible, intangible, and existing only in the contemplation of the law.”
- It provides shareholders limited liability from corporate debts.
- This is one of the most important reasons for incorporating.
- It is formed under state or federal law or the laws of other countries.
- A corporate charter is obtained from one of the fifty states.
- Shares of stock may be transferred freely providing there are no restrictions.
- It has continuity of life.
- If a shareholder dies or sells his/her shares, the corporation continues doing business as usual.
- It can buy, sell, and own property in its own name.
- It can enter into contracts with others.
- It can sue and be sued in its own name.
- It can be a partner in another business.
- Its name is signed by corporate seal.
Reasons for Success:
The large-scale corporation has become the dominant form of economic organization in Western industrial society for the following reasons:
1. The corporation is generally the most practical form of business organization for the raising of capital. A concern must be built on a large scale to take advantage of technological developments and to compete successfully with other companies.
2. To obtain the plant, equipment, and marketing outlets necessary for a large undertaking, a corporation needs an amount of capital that may run more than any individual or even groups of individuals could supply.
3. An essential organizational requirement has been a form of enterprise that could amass vast amounts of capital from a large number of people.
4. The system of share ownership of the corporation, in conjunction with the development of a capital market for the impersonal purchase and sale of stock, has led to corporations having assets in the billions of dollars and having hundreds of thousands of shareholders.
5. The corporation provides continuity of organization and assets. Typically a business concern with many millions of dollars invested in plant and equipment needs to have an organization that is continuous regardless of changes in stockholders or management.
6. The corporation with its limitless life-span, regardless of changes in the individuals who make it up, is almost necessarily the form, of business organization required when great amounts of property are involved.
7. The corporation provides an independent management. Large concerns typically have many stockholders who have invested their money be cause they could hope for profits without having to participate actively in the management of the company.
8. The corporation provides limited liability for the individual. The business concern would have found it impossible to amass capital from large numbers of people who had little further to do with the concern if such stockholders could be held liable for the debts of the enterprise.
9. The corporation is an entity. The management of a company must be able to carry on its business not as a number of individuals but as an entity.
10. The corporation provides operational freedom to management. The management of a large concern must have a great deal of freedom and flexibility to operate if it is going to deal adequately with the many groups essential in making the complex organization operate.
11. The corporation, with its separation of stockholders from manager and its ability to act as an independent unit, provides this operational flexibility.
As a result of these advantages the corporation is the dominant form of business enterprise in industrial capitalist societies. Only in those fields of economic activity that operate typically on a small scale, such as in agriculture, do other forms of business organization predominate. In the United States, where the corporation is in an advanced stage of development, the large corporation with assets in the billions of dollars, hundreds of thousands of stockholders, and tens of thousands of employees has become the backbone of the economy.
Above all, the corporation is the dominant form of business organization in the free-market economies of the Western world. Thus it has become one of the most important institutions of modern times. In addition, the corporate form of organization has been widely employed for public purposes and in private activities of a nonprofit nature.
The association of human beings in pursuit of a common objective is as old as history. However, the corporation has evolved into a collective entity which is separate and distinct from the individuals who constitute it. Thus the modern corporation is a sophisticated concept that has only gradually developed.
Legally, the corporation is an artificial person. It can act and contract; sue and be sued; and manage and convey property. Although its individual members may change, the life of a corporation may be perpetual unless limited by its charter or voluntarily dissolved by its members. One of the most important characteristics of the corporation is that its members enjoy limited liability. The debts of the corporation are the debts of the separate legal “person” that is the corporation, and therefore the individual members are not legally responsible for them under ordinary circumstances.
“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. The objects of corporations are deemed beneficial to the country. By revolution, the duties, as well as the powers of government changed hands.”(Dartmouth v. Woodward)
BIBLOGRAPHY
1. The Divergence of Corporate Finance and Law In Corporate Governance; Spring, 1995; 46 S.C. L. Rev. 449
2. BALDWIN, Modern Political Institutions (Boston, 1898), 141 sq
3. BLACKSTONE, Commentaries upon the Laws of England, ed.
4. KENT, Commentaries upon American Law (Boston, 1854), I, 526, and note, II, 268 sq.
5. Roman Law (London, 1898), 160-163
6. SOHM, Institutes of Roman Law (Oxford, 1892), 106
7. Decision of U. S. Supreme Court, Dartmouth College v. Woodward in IV Wheatons Reports (New York, 1819), 518, 636
8. ELLIOTT, Corporations (Indianapolis, Indiana, 1900)
9. Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
10. Hansmann et al., The Anatomy of Corporate Law, pg 7.
- John Marshall, Trustees of Dartmouth College v. Woodward (1819)
[1] See, http//www.wikipedia.org
[2] See, South African Constitution Art.8, especially Art (4)
[3] See, The Business Corporations Act (B.C.) [SBC 2002] Chapter 57, Part 10
[4] See, Lennard’s Carrying Co. Ltd vs Asiatic Petroleum Co. Ltd [1915] AC 705
[5] See, Hansmann et al. The Anatomy of Corporate Law, pg 7
[6] Definition of Seymour D. Thompson, in 10 Cy., pp. 143-4, substantially the same as the definition given in Thompson on Corporation, Sec. 1.