Corporation

From Wikicpa

A corporation is a legal person which, while being composed of natural persons, exists completely separately from them. This separation gives the corporation unique powers which other legal entities lack. The extent and scope of its status and capacity is determined by the law of the place of incorporation.

Investors and entrepreneurs often form joint stock companies and incorporate them to facilitate a business; as this form of business is now extremely prevalent, the term corporation is often used to refer specifically to such business corporations. Corporations may also be formed for political, religious or charitable purposes (not-for-profit corporations), or as government or quasi-governmental entities (public corporations).

1 Legal status
2 References
3 External links

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Legal status

The law typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person); United States law recognises this as corporate personhood. Under such a doctrine (obviously a legal fiction), a corporation enjoys many of the rights and obligations of individual persons, such as the ability to own property, sign binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a corporation cannot become a citizen and vote.)

In common law countries, the classic statement of this principle is found in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, where Lord Haldane said:

"My Lords, 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."

The most salient features of incorporation include:

Limited Liability: Unlike in a partnership or sole proprietorship, members of a corporation hold no liability for the corporation's debts and obligations: see leading case in common law, Salomon v. Salomon & Co. [1897] AC 22. As a result their "limited" potential losses cannot exceed the amount which they contributed to the corporation as dues or paid for shares. The economic rationale for this lies in the fact that it allows anonymous trading in the shares of the corporation by virtue of eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would not likely allow any share to be sold to a buyer of at least equivalent creditworthiness as the seller. Limited liability further allows corporations to raise funds for riskier enterprises by removing risks and costs from the owners and shifting them onto creditors and to other members of society, thereby creating an externality. Another rationale sometimes offered for limited liability is reducing the amount that an investor can lose reduces the time and effort required to determine whether a stock is risky, thus adding liquidity to the stock market - in contrast to the very illiquid market for partnership interests (however, given the due diligence already exercised by institutional and other large investors, and the availability of insurance, it is questionable whether added liability would increase the costs of determining risk sufficiently to impair the liquidity of the stock market). In any event, a lender or other creditor can require a personal guarantee on a loan to a corporation (normally a small corporation), thus introducing personal liability.
Perpetual Lifetime: The assets and structure of the corporation exist beyond the lifetime of any of its members or agents. This allows for stability and accumulation of capital (economics), which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution. This feature also had great importance in the medieval period, 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. It is important to note that the "perpetual lifetime" feature is an indication of the unbounded potential duration of the corporation's existence, and its accumulation of wealth and thus power. (In theory, a corporation can have its charter revoked at any time, putting an end to its existence as a legal entity. However, in practice, dissolution only occurs for corporations that request it or fail to meet annual filing requirements.)

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Ownership and control

Humans and other legal entities composed of humans (such as trusts and other corporations) can be members of corporations. In the case of for-profit corporations, these members hold shares and are thus called shareholders. When no members or shareholders exist, a corporation may exist as a "memberless corporation" or similar — this second type of corporation counts as a not-for-profit corporation. In either category, the corporation comprises a collective of individuals with a distinct legal status and with special privileges not provided to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals.

Typically, a board of directors governs a corporation on the behalf of the members. The corporate members elect the directors, and the board has a fiduciary duty to look after the interests of the corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers are usually chosen by the board to manage the affairs of the corporation.

Corporations can also be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a control interest analogous to that of a shareholder, including one or more seats on the board of directors. Creditors are not said to "own" the corporation as shareholders do, but can outweigh the shareholders in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit.

Members of a corporation are said to have a "residual interest." Should the corporation end its existence, the members are the last to receive its assets, following creditors and others with interests in the corporation. This can make investment in a corporation risky; however, the risk is outweighed by the corporation's limited liability, which ensures that the member will only be liable for the amount they contributed.

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Formation

Historically, corporations were created by special charter of governments. Today, corporations are usually registered with the state, province, or federal government and become regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must designate the principal address of the corporation (where to contact it in the event of legal process), and often 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.

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Naming

Corporations generally have a distinct name. Historically, corporations were named after their membership: for instance, "The President and Fellows of Harvard College." Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers (e.g., "1234567 Ontario Limited"). (See the section Pre-modern corporations below for more examples of historical names.)

In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity. See Types of corporations for a full list. These terms, known as words of limitation, obviously vary by jurisdiction and language. Their use puts all persons on constructive notice that they have to deal with an entity whose liability remains limited, in the sense that it does not reach back to the persons who constitute the entity; one can only collect from whatever assets the entity still controls at the time one obtains a judgment against it.

Certain jurisdictions do not allow the use of the word "company" alone to denote corporate status, since the word "company" may refer to a partnership or to a sole proprietorship, or even, archaically, to a group of not necessarily related people (for example, those staying in a tavern).

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Unresolved issues

The nature of the corporation continues to evolve, both through existing corporations pushing new ideas and structures, courts responding, and governments regulating in response to new situations. A question of long standing is that of diffused responsibility: for example, if the corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, management and staff of the corporation, and the corporation itself? See corporate manslaughter specifically, and corporate liability generally.

The present law differs among jurisdictions, and is in a state of flux. Some argue that the owners of the business - the shareholders - should be ultimately responsible for such circumstances, forcing them to consider issues other than profit when investing, but the modern corporation may have many millions of small shareholders who know nothing about its business activities. In addition, traders — especially hedge funds — may rapidly turn over their partial ownership of a corporation many times a day.

One position is that the directors should be passed the burden of moral and legal responsibility as part of their job of representing the shareholders. Another position is that the artificial entity of the corporation itself should be held liable, in accordance with the model of a corporation as a natural person. In some jurisdictions, both directors and the corporation are liable for certain offences (see, for example, the Canadian province of Ontario's Environmental Protection Act). The issue of corporate repeat offenders (see H.Glasbeak, "Wealth by Stealth: Corporate Crime, Corporate Law, and the Perversion of Democracy" (Between the lines press: Toronto 2002) raises the question of the so-called "death penalty for corporations." [1]

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References

Robert Sobel, The Age of Giant Corporations: a Microeconomic History of American Business, 1914-1984 (1984)
Klein and Coffee. Business Organization and Finance: Legal and Economic Principles (Foundation, 2002), ISBN 158778713X
Hessen, Robert. In Defense of the Corporation. (Hoover Institute 1979), ISBN 081797072X
Kirzner, Israel M. Competition and Entrepreneurship (University of Chicago Press, 1973), ISBN 0226437760
Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.
Conard, Alfred F. Corporations in Perspective. 1976.
John Micklethwait and Adrian Wooldridge, The Company: a Short History of a Revolutionary Idea (New York: Modern Library, 2003).
Joel Bakan, The Corporation. The pathological pursuit of profit and power (Toronto: Viking Canada, 2004).
Alfred Sohn-Rethel Economy and Class Structure of German Fascism,London, CSE Bks, 1978 ISBN 0906336007