CORPORATION BY LAW
John Marshall sets the view that the government, whether federal or state, must honor contracts of previous governments that are no longer in power. This case was the Dartmouth college case in 1819.
In this case he also gave a corporation an artificial being status. “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)
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.
“When, then, a law is in its nature a contract, when absolute rights have vested under that contract, a repeal of the law cannot divest those rights; and the act of annulling them if legitimate, is rendered so by a power applicable to the case of every individual in the community.” Marshall then defines a contract as a compact between two or more parties, and is either executor or executed.
An executor contract is one in which a party binds himself to do, or not to do, a particular thing;… A contract executed is one in which the object of contract is performed; and this, says Blackstone, differs in nothing from a grant.” Both contracts Marshall says, “contains obligations binding on the parties,” and a grant implies “a contract not to reassert that right.”(Fletcher v. Peck)
WHAT IS CORPORATION?
Corporation is an organization formed with state governmental approval to act as an artificial person to carry on business (or other activities), which can sue or be sued, and (unless it is non-profit) can issue shares of stock to raise funds with which to start a business or increase its capital. One benefit is that a corporation’s liability for damages or debts is limited to its assets, so the shareholders and officers are protected from personal claims, unless they commit fraud. For private business corporations the articles of incorporation filed with the Secretary of State of the incorporating state must include certain information, including the name of the responsible party or parties (incorporators and agent for acceptance of service), the amount of stock it will be authorized to issue, and its purpose.
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 purposes of clothing bodies of men, in succession, with these qualities and capacities those corporations was invented and are in use.
The Principal Characteristics of Corporations:
1) A corporation may be created only by permission of the State Government.
2) A corporation is a legal person and a legal entity independent of its owners (called shareholders) and its managers (called officers and the board of directors). Its life is unaffected by the retirement or death of its shareholders, officers and directors. A corporation is a person under the Constitution of the United States. Like natural persons, it is protected from unreasonable searches and seizures and is guaranteed due process and equal protection under the law. It also has free speech rights. It has its own domicile and its own place of residence, whose locations determine in part whether a state may constitutionally impose its laws on the corporation.
3) A corporation may acquire, hold and convey property in its own name. A corporation may sue and be sued in its own name. Harm to a corporation is not harm to the shareholders; therefore, with few exceptions a shareholder may not sue to enforce a claim of the corporation.
4) A shareholder has no right or duty to manage, the business of the corporation. The directors and officers need not be shareholders.
5) The shareholders have limited liability. With few exceptions, they are not liable for the debts of a corporation beyond their capital contributions to the corporation. The corporation is a legal entity separate from its shareholders, even if there is only one shareholder. Corporation law erects an imaginary wall between a corporation and its shareholders that protects shareholders from liability for a corporation’s actions. Therefore, obligations of a corporation are not obligations of its shareholders, and acts of a corporation are not acts of its shareholders. Consequently, the shareholders’ liability is limited to their capital contributions to the corporation. Nevertheless, courts will sometimes ignore the separateness of a corporation and its shareholders by piercing the corporate veil. The primary consequence of piercing the corporate veil is that a corporation’s shareholders may lose their limited liability.
6) Generally, the ownership interest in a corporation is freely transferable. A shareholder may sell his shares to whomever he wants whenever he wants. The purchaser becomes a shareholder with the same rights that the seller had.
7) Generally, shareholders owe no fiduciary duties to the corporation. A shareholder who is not an officer or a director may deal with the corporation as may any other person. A shareholder may be a creditor of the corporation.
8) A corporation pays state and federal income taxes on its income. Shareholders have personal income from the corporation only when the corporation makes a distribution of its assets to them, as when the corporation pays dividends to its shareholders.
TYPES OF CORPORATION:
In the United States there are three major types of corporations: Close, C, and S.
Close corporations issue stock, but the amount of shareholders is greatly limited, usually to less than thirty. Given the small number of shareholders, normally all are involved in board-level decision making. Transfer and sale of stock is also tightly controlled.
C corporations are the most common type of corporation in the United States. They allow for theoretically unlimited amounts of stock to be issued, and usually have a smaller board of directors which make decisions. C corporations pay taxes both at the corporate level, and at the personal level, as shareholders pay taxes on their dividends.
ADVANTAGES OF CORPORATION:
- Limited Liability – shareholders of the corporation are not liable for the debts and obligations of a corporation
- Ownership Easily Transferable – Ownership can be easily transferred by transferring shares
- Perpetual Existence – The corporation exists even when the principal agents change
- Tax Advantages – Corporations have the ability to have tax deductions
- Raising Capital – Lenders are more willing to lend capital to a corporation
- There may be many advantages to using a corporation to carry on business depending on your circumstances. Some of the main advantages of using a corporation to conduct business include the following:
- Ownership Easily Transferable: Ownership of a corporation is transferred easily by transferring the shares. It can be as simple as endorsing the back of the share certificate in favor of the new owner of the shares. The change of ownership is then recorded in the records of the corporation. However, if the corporation is actively carrying on business, the new owners will require various representations and warranties both from the seller of the shares and from the corporation. The seller will also wish to exclude liability in certain areas and limit the representations and warranties given. Also, certain technical requirements of the governing legislation must be met.
- Perpetual Existence: Since a corporation is a separate legal entity from the shareholders, the corporation can have perpetual existence. It continues as a corporation in law even if the ownership of the corporation itself changes. This provides for continuity for the business of the corporation.
- Tax Advantages: Under United States income tax laws, there are tax advantage to operating a business through a corporation as opposed to a sole proprietorship, a partnership or some other form. If a corporation qualifies as a small business and has active income, then it can take advantage of the small business deduction and pay income taxes at a substantially reduced rate. There can be a substantial tax saving compared to doing business outside of a corporation..
DISADVANTAGES OF CORPORATION:
- Greater Regulations – Regulations can add to the cost of doing business
- Cost of Organization – Corporations are more expensive to set-up
- Record Keeping – shareholders may be legally penalized for not keeping accurate record keeping
- Double Taxation – the corporation pays taxes on the corporate income and the shareholder pays taxes on the dividends paid by the corporation
- Director and Shareholder Liability – Generally the shareholders of the corporation have limited liability but under certain state regulations and acts the shareholders of the corporation may be held liable for the acts of a corporation
- There are disadvantages to using a corporation to conduct business. These should be considered carefully before selecting the corporation to carry on business.
- Greater Regulation A corporation can be subject to greater regulation that can add to the cost of doing business. Various regulations may have to be complied with, for example, to sell shares, or raise capital.
- Cost of Organization: The cost of organization for a corporation can be greater than for a sole proprietorship or a partnership. As well, there will be legal fees involved.
THE MORDERN CONCEPT OF CORPORATION:
The limited liability company is a relatively new innovation in the United States, intended as a way to help small businesses gain many of the benefits enjoyed by corporations, while allowing them to retain their small business model of ownership. A traditional corporation requires a number of things that a limited liability company does not need to create. Corporations have shareholders, for example, and must meet a certain number of times per year at shareholder meetings to make decisions. A limited liability company does not have shareholders and does not require meetings. Similarly, a limited liability company does not need to create a set of bylaws, though some states require an operating agreement in order to recognize the company.
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.
Do Corporations Have Rights?
Corporations have no independent standing under international human rights law, but recent Supreme Court rulings have affirmed that corporations, as legal entities, have legal rights that appear to be distinct from, albeit contingent upon, the legal rights of its constituent members.
The first Supreme Court case establishing corporate personhood, of a fashion, was Santa Clara County v. Southern Pacific Railroad Company (1886), in which Chief Justice Morrison Waite held that:
The modern corporation is the most important form of business in the history of the world. It has facilitated the rapid economic development of the last 150 years by permitting businesses to attain economies of scale. Businesses organized as corporations can attain such economies because they usually have a greater capacity to raise capital, a capacity created by corporation law. Corporation law allows people to invest their money in a corporation and become owners without imposing unlimited liability or management responsibilities on themselves. Many people are willing to invest their savings in a large, risky business if they have limited liability and no management responsibilities. Far fewer people are willing to invest in a partnership or other business form in which owners have unlimited liability and management duties.
Corporations are the form of business organization most often associated with the term business. Most large businesses are corporations. Corporations are creations of the state, with methods of creation dictated by state statute. Businesses are generally required to file their articles of incorporation with the Utah Division of Corporations and Commercial Code. Upon approval, the incorporators designate the board of directors and issue stock. The directors are subsequently elected by the shareholders and are responsible for establishing corporate policy. They have a fiduciary duty to preserve the corporation. The board is empowered to hire managers to operate the business and conduct its affairs. The shareholders are the owners of the corporation. They enjoy limitedliability, but do not participate in the day-to-day management of the business.
In the words of Chief Justice Marshall in Dartmouth v Woodward (1819):
“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creation of law, it possesses only those properties which the charter of its creation confers upon it…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, so that they may act as a single individual A corporation manages its own affairs, and holds property without the hazardous and endless necessity of perpetual conveyance for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use. By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being.”
Creating a Corporation:
A corporation is formed in the state of Utah by filing Articles of Incorporation in duplicate with the Division of Corporation and Commercial Code, together with the appropriate fee. The following information may be of assistance to you – we encourage you to consult an attorney to ensure your fullest legal protection and benefit.
1) The Articles of Incorporation must include the following information (U.C.A. Section 16-10a-202):
A) The corporate name (must contain the word or abbreviation of the word “Corporation,” “Company,” or “Incorporated.”)
B) The purpose or purposes for which the corporation is formed.
C) The number of shares the corporation is authorized to issue. If more than one class of shares is authorized, each class must be designated along with a description of the preferences, limitations and relative rights of each class. For addition information, see Title 16-10a-601 of the Utah Code.
D) The name and address of each of the incorporators (one or more persons may act as incorporators.)
E) The Utah street address of the corporation’s initial registered office and the name of its initial registered agent at such address.
F) The signature of each of the incorporators.
G) A statement in the Articles of Incorporation or an attachment signed by the Registered Agent acknowledging acceptance as such.
2. When filing Articles of Incorporation, you must include the following:
A) One (1) copy, originally signed, of Articles of Incorporation and one (1) copy of the original containing all of the information listed above.
B) The filing fee of $70.00.
A corporate security may be either:
(1) a share in the corporation or
(2) an obligation of the corporation.
Power of corporations:
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. This right was largely modified by the statutes of mortmain in England and has been strictly regulated and greatly limited by American legislation. The fourth original power possessed by corporations was that of having a common seal. As was said by the ancient law writers of England, 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. In modern times many corporations are expressly authorized by legislation to act without using a seal, and the decisions of the courts have generally held, at least in modern times, that a corporation was bound by implication in many cases where its acts had not been attested by the corporate seal. The fifth privilege of a corporation, which has existed from time immemorial and still exists, is that of making by-laws or providing statutes for the regulation of its own affairs; and these are binding upon the corporation and its members unless contrary to the law of the land. This right was allowed by the Law of the Twelve Tables at Rome.
Privileges and disabilities
A corporation must always appear by attorney or agent (the actor or syndicus of the Roman law) for it cannot appear in person; being, as Sir Edward Coke says, invisible and existing only in contemplation of the law. Under the strict construction of its legal quality the courts of England originally held that a corporation could not be held liable for any action based upon tortious conduct; that is, a corporation could not be held liable for personal injuries inflicted by the wrongful act or culpable neglect of its agents. It is now held however, both in England and America, that a corporation is liable in damages for any wrong committed by its servants or agents when acting within the scope of the duties which properly devolve upon them. The doctrine designated by the term ultra vires is that which governs the courts in limiting the liability of a corporation to acts which are expressly authorized by its charter, or acts which are defined by its original articles of institution to be within the scope of its corporate operations. This doctrine is sound because it would be contrary to public policy to hold that a corporation had the right to do any act or to undertake any course of transactions which was not within the scope of the powers which it originally declared itself as possessing. However, the application of this doctrine is so restricted by the courts as not to allow corporate officers to use the doctrine as a cloak for deeds not equitable in their nature. It is construed strictly by the courts as a shield and is not allowed to operate as a sword.
The necessity of supervision over corporate acts being generally acknowledged, it was held at common law that every corporation had, necessarily, a visitor. As Blackstone well says, “Corporations, being composed of individuals, subject to human frailties, are liable as well as private persons, to deviate from the end of their institution. And for that reason the law has provided proper persons to visit, inquire into and correct all irregularities that arise in such corporations, either sole or aggregate, and whether ecclesiastical, civil or eleemosynary”. Prior to the religious revolution of the sixteenth century the pope was the visitor of the archbishops and metropolitans. In respect to all lay corporations, the founder, his heirs, or assigns are the visitors under the English system. In the various States of the American Union visitors of corporations are practically unknown; the supervision of private corporations being vested in courts of equity. In England the king is considered as the visitor for all civil corporations, and this jurisdiction is exercised through the Court of King’s Bench.
Any member of a corporation may be disfranchised, that is, he may lose his membership in the corporation by acting in such manner as to forfeit his rights under a provision of the by-laws; or he may resign from the corporation by his own voluntary act. A resignation by parole, if entered upon the records and accepted by the corporation, is sufficient. The corporation itself may be dissolved and in such case, at common law, debts due from a corporation were wholly extinguished ipso facto by such dissolution.
- Davis, J.S. (1917). Essays in the Earlier History of American Corporations (vols. 1–2 ed.). Cambridge, MA: Harvard University Press.
- Ekelund, R.B. & Tollison, R.D. (1980). “Mercantilist origins of the corporation”. Bell Journal of Economics (The RAND Corporation) 11 (2): 715–720. doi:10.2307/3003390. http://jstor.org/stable/3003390.
- Fisher, F. J. (1933). “Some experiments in company organization in the early seventeenth century”. Economic History Review (Blackwell Publishing) 4 (2): 177–194. doi:10.2307/2590601. http://jstor.org/stable/2590601.
- Freedman, C.E. (1979). Joint-Stock Enterprise in France 1807–1867: From Privileged Company to Modern Corporation. Chapel Hill: University of North Carolina Press.
- Hunt, B.C. (1936). The Development of the Business Corporation in England, 1800–1867. Cambridge, MA: Harvard University Press.
- Lobban, M. (1996). “Corporate identity and limited liability in France and England 1825-67”. Anglo-American Law Review 25: 397.
- Mayson, S.W et al. (2005). Mayson, French & Ryan on Company Law (22nd ed.). London: Oxford University Press. ISBN 0-19-928531-4.
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