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A corporation is an artificial legal entity (technically, a juristic person) which, while made up of a number of natural persons or other legal entities, has a separate legal identity from them. As a legal entity the corporation receives legal rights and duties. Five rights always exist for a corporation: the ability to sue and be sued (this gives the corporation access to the courts); the right to a common treasury (this gives the right to hold assets separate from the assets of its members); the right to hire agents (this gives the corporation the right to hire employees); the right to a common seal (this gives the corporation the right to sign contracts); and the right to make by-laws (this gives the corporation the right to govern its internal affairs). Governments and courts may add other rights and duties. These will vary from jurisdiction to jurisdiction.[1] The granting of additional rights to corporations is often very controversial. 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 the policy of the law with the capacity of acting in several respects as an individual, ...".[2]
The prevalence of the modern business corporation often obscures the fact that other forms of corporations exist and did exist for many years before the emergence of the modern business corporation. 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 local government (municipal corporation), political, religious, and charitable purposes (not-for-profit corporation), or government programs (government-owned corporation). As a generic legal term, corporation refers to any group which has legal personality. Historically the modern business corporation emerges with the blending of the traditional corporation with the joint-stock company.
Legal statusThe law typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person). Under such a doctrine (traditionally seen as 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, nor vote.) On the other hand, corporations often have rights not granted to individuals, such as treaty rights or as an example, the right to stockpile restricted pharmaceuticals without a prescription.[1]. In common law countries, 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:
Ownership and controlHumans and other legal entities composed of humans (such as trusts and other corporations) can have the right to vote or share in the profit of corporations. In the case of for-profit corporations, these voters hold shares of stock as proof of ownership of the corporation, and are thus called shareholders or stockholders. When no stockholders exist, a corporation may exist as a non-stock corporation, and instead of having stockholders, the corporation has members who have the right to vote on its operations. If the non-stock corporation is not operated for profit, it is called 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. For the purposes of the next few paragraphs, the term "members" will be used to refer to stockholders of a stock corporation and members of a non-stock corporation. 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 controlling interest analogous to that of a member, including one or more seats on the board of directors. Creditors are not said to "own" the corporation as members do, but can outweigh the members in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit. Members of a corporation (except for non-profit corporations) 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 members will only be liable for the amount they contributed. This only applies in the case of for-profit corporations; non-profits are not allowed to have residual benefits available to the members. FormationHistorically, corporations were created by special charter of governments. Today, corporations are usually registered with the state, province, or national 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 in many cases be required to designate the principal address of the corporation as well as a registered agent (a person or company that is designated to receive legal service of process). As part of the registration, it may also be required to designate an agent or other legal representative of the corporation depending on the filing jurisdiction. 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. NamingSee Types of corporations for a full list. Corporations generally have a distinct name. Historically, some 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 based on their Provincial Sales Tax registration number (e.g., "1234567 Ontario Limited"). In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity. Of course, these terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not.[4] 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). Unresolved issuesThe nature of the corporation continues to evolve 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. (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." [2] OriginsEtymologyThe word "corporation" derives from the Latin Corpus (body), representing a "body of people"; that is, a group of people authorized to act as an individual (Oxford English Dictionary). The word universitas also used to refer to a group of people but now refers specifically to a group of scholars (see University). In England the term corporation was also used for the local government body in charge of a borough. This style was replaced in most cases with the term council in Britain in 1973, and in the Republic of Ireland in 2001. The sole exception is the Corporation of London which retains the title. Pre-modern corporationsCorporations have been present in some forms as far back as ancient India and ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, they nonetheless were enterprises with a form of shareholders who invested money for a specific purpose. Such corporations in the Roman Empire were sanctioned by the state, while such corporations in the Maurya Empire were mostly private commercial entities.[5] With the collapse of the Roman Empire, the Roman conception of the corporation merged with other views. Germanic tribes, for example, maintained that a group entity in and of itself could have a separate identity from that of its members. These influences came together in the body of canon law built around the conception of the church as corporate structure in the Middle Ages. Different theories of the church as corporate body were favored by different individuals but all agreed on one key component: that the church was more than just its members and could maintain an existence perpetually, regardless of the death of any individual member. This, together with discussion as to the relationship between the head of a corporation (such as the Pope) and its members, contributed not only to the development of modern corporations and corporate theory but also set the stage for many ideas that would come to fruition during the enlightenment. Kenneth Pomeranz, an economic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war) accounts for the development of this economic structure in Europe but not in China or in the Middle East. The law classifies a corporation either as a corporation sole (one person) or as a corporation aggregate (any other number). Development of modern commercial corporationsImage:Vereinigte Ostindische Compagnie bond.jpg A bond issued by the Dutch East India Company, dating from 1623, for the amount of 2,400 florins Early corporations of the commercial sort were formed under frameworks set up by governments of states to undertake tasks which appeared too risky or too expensive for individuals or governments to embark upon. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company, and these corporations came to play a large part in the history of corporate colonialism. In the United States, government chartering began to fall out of vogue in the mid-1800s. Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the greater corporate registration revenues available by providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state. Delaware followed, and soon became known as the most corporation-friendly state in the country after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realized, but by then it was too late; even today, most major public corporations are set up under Delaware law. The 20th century saw a proliferation of enabling law across the world, which some argue helped to drive economic booms in many countries before and after World War I (the advantage to the overall economy of enabling laws must, however, be viewed in light of the success of Carnegie Steel and Standard Oil, the economic stimulus of the war, the flourishing of the automotive sector, and other major economic drivers). Starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly owned services and enterprises to private, normally corporate, ownership. Deregulation -- reducing the public-interest regulation of corporate activity -- often accompanied privatization as part of an ideologically laissez-faire policy. Another major postwar shift was toward development of conglomerates, in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. While corporate efficiency (and profitability) skyrocketed, small shareholder control was diminished and directors of corporations assumed greater control over business, contributing in part to the hostile takeover movement of the 1980s and the accounting scandals that brought down Enron and WorldCom following the turn of the century. More recent corporate developments include downsizing, contracting-out or out-sourcing, off-shoring and narrowing activities to core business, as information technology, global trade regimes, and cheap fossil fuels enable corporations to reduce and externalize labour costs, transportation costs and transaction costs, and thereby maximize profits. For a history of corporations that is “pro-corporate”, see John Micklethwait and Adrian Wooldridge, The Company: a Short History of a Revolutionary Idea (New York: Modern Library, 2003). For a history of corporations that is “critical”, see Joel Bakan, The Corporation. The pathological pursuit of profit and power (Toronto: Viking Canada, 2004). Types of corporationsMost corporations are registered with the local jurisdiction as either a stock corporation or a non-stock corporation. Stock corporations represent ownership of the corporation by shares of stock. A stock corporation is generally a for-profit corporation. A non-stock corporation does not have owners, but may have members who have voting rights in the corporation. Some jurisdictions (Washington, D.C., for example) separate corporations into for-profit and non-profit, as opposed to dividing into stock and non-stock. For-profit and non-profitIn modern economic systems, conventions of corporate governance commonly appear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, the courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or in a similar manner) when applying principles to non-profit organisations — as the underlying structures of these two types of entity often resemble each other. Closely held and publicThe institution most often referenced by the word "corporation" is a public or publicly traded corporation, the shares of which are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public. Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of ownership interests. Many such corporations are owned and managed by a small group of businesspeople or companies, although the size of such a corporation can be as vast as the largest public corporations. Closely held corporations have a few advantages over publicly traded corporations. A small, closely held company can often make company changing decisions much more rapidly then a publicly traded company. A publicly traded company is also at the mercy of the market, having capital flow in and out based not only one what the company is doing but the market and even what the competitors are up too. Publicly traded companies also have advantages over their closely held counterparts. Publicly traded companies often have more working capital and can delegate debt though out all share holders. This means that people invested in a publicly traded company will each take a much smaller hit to their own capital as opposed to those involved with a closely held corporation. Publicly traded companies though suffer from this exact advantage. A small corporation can often voluntarily take a hit to profit with little to no repercussions (as long as it is not a sustained loss). A publicly traded company though often comes under extreme scrutiny if profit and growth are not evident to stock holders, thus stock holders may sell, further damaging the company. Often times this blow is enough to make a small public company fail. Often times communities benefit from a closely held company more so then from a public company. A closely held company is far more likely to stay in a single place that has treated them well, even if going through hard times. The owners can incur some of the damage the company may receive from a bad year or slow period in the company profits. Workers benefit in that closely held companies often have a better relationship with workers. In larger, publicly traded companies, often when a year has gone badly the first area to feel the effects are the work force with lay offs or worker hours, wages or benefits being cut. Again, in a closely held business the owners can incur this profit damage rather then passing it to the workers. Closely held businesses are also often known to be more socially responsible than publicly traded companies. The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is that publicly traded corporations have the burden of complying with additional securities laws, which (especially in the U.S.) may require additional periodic disclosure (with more stringent requirements), stricter corporate governance standards, and additional procedural obligations in connection with major corporate transactions (e.g. mergers) or events (e.g. elections of directors). Mutual Benefit CorporationsA mutual benefit nonprofit corporation is formed solely for the benefit of its members. An example of a mutual benefit nonprofit corporation is a golf club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide, in its corporate bylaws, how many members to have, and who can be a member. Generally, while it is a nonprofit corporation, a mutual benefit corporation is not a charity. Because it is not a charity, a mutual benefit nonprofit corporation cannot obtain 501(c)(3) status. If there is a dispute as to how a mutual benefit nonprofit corporation is being operated, it is up to the members to resolve the dispute since the corporation exists to solely serve the needs of its membership and not the general public.[6] Multinational corporationsFollowing on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations: growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of globalizing. The typical "transnational" or "multinational" may fit into a web of overlapping ownerships and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favour national or regional branches; growth by acquisition or merger can result in a plethora of groupings scattered around and/or spanning the globe, with structures and names which do not always make clear the structures of ownership and interaction. In the spread of corporations across multiple continents, the importance of corporate culture has grown as a unifying factor and a counterweight to local national sensibilities and cultural awareness. AustraliaIn Australia corporations are registered and regulated by the Commonwealth Government through the Australian Securities and Investments Commission. Corporations law has been largely codified in the Corporations Act 2001. BrazilIn Brazil there are many different types of corporations ("sociedades"), but the two most common ones commercially speaking are: (i) "sociedade limitada", identified by "Ltda." after the company's name, equivalent to the British limited company, and (ii) "sociedade anônima", identified by "SA" after the company's name, equivalent to the British public limited company. The "Ltda." is mainly governed by the new Civil Code, enacted in 2002, and the "SA" by the Law 6.404 dated 15 December 1976. CanadaIn Canada both the federal government and the provinces have corporate statutes, and thus a corporation may have a provincial or a federal charter. Many older corporations in Canada stem from Acts of Parliament passed before the introduction of general corporation law. The oldest corporation in Canada is the Hudson's Bay Company, chartered in 1670. Federally recognised corporations are regulated by the Canada Business Corporations Act. German-speaking countriesGermany, Austria, Switzerland and Liechtenstein recognise two forms of corporation: the Aktiengesellschaft (AG), analogous to public corporations in the English-speaking world, and the Gesellschaft mit beschränkter Haftung (GmbH), similar to (and an inspiration for) the modern limited liability company. ItalyItaly recognises two forms of companies with limited liability: "S.r.l", or "Società a Responsabilità Limitata" (similar to Limited liability company) and "S.p.A" or "Società Per Azioni" (similar to American stock corporation). United KingdomIn the United Kingdom, corporations are generally called companies. The most common type of company is the private limited company ("Limited" or "Ltd."). Private limited companies can either be limited by shares or by guarantee. Other corporate forms include the public limited company ("PLC") and the unlimited company. United StatesSeveral types of corporation exist in the United States. Generically, any business entity that is recognized as distinct from the people who own it (i.e., is not a sole proprietorship or a partnership), is a corporation. This generic label includes entities that are known by such legal labels as ‘association’, ‘organization’ and ‘limited liability company’, as well as corporations proper. Only a company that has been formally incorporated according to the laws of a particular state is called ‘corporation’. American corporations can be either profit-making companies or non-profit entities. Tax-exempt non-profit corporations are often called “501(c)3 corporation”, after the section of the IRS Code that addresses their tax exemption. Corporations are created by filing the requisite documents with a particular state government. The process is called “incorporation” and refers to the abstract concept of clothing the business entity with a veil of artificial personhood (of “corporating” it – ‘corpus’ being the Latin for “body”). Only certain corporations, such as banks, are chartered. The rest merely file their articles of incorporation with the state government as part of a registration process. The federal government can only create corporate entities pursuant to relevant powers in the U.S. Constitution. For example, Congress has constitutional power to regulate banking, so it has power to charter federal banks. Additionally, Congress has power to create and own corporations that serve a purpose of the federal government, such as Amtrak and the U.S. Postal Service. Once incorporated, the corporation has artificial personhood everywhere it may operate, until such time as the corporation may be dissolved. A corporation that operates in one state while being incorporated in another is a “foreign corporation.” This label also applies to corporations incorporated outside of the United States. Foreign corporations must usually register with the Secretary of State’s office to lawfully conduct business in that state. A corporation is legally a citizen of the state (or other jurisdiction) in which it is incorporated (except when circumstances direct the corporation be classified as a citizen of the state in which it has its head office, or the state in which it does the majority of its business). Corporate business law differs from state to state, and many prospective corporations choose to incorporate in a state whose laws are most favourable to its business interests. Many large corporations are incorporated in Delaware, for example, without actually being located there because that state has very favourable corporate tax laws. Companies set up for privacy or asset protection often incorporate in Nevada, which does not require disclosure of share ownership. Many states, particularly smaller ones, have modeled their corporate statutes after the Model Business Corporation Act, one of many model sets of law prepared and published by the American Bar Association. As juristic persons, corporations have certain rights that attach to natural purposes. The vast majority of them attach to corporations under state law, especially the law of the state in which the company is incorporated – since the corporations very existence is predicated on the laws of that state. A few rights also attach by federal constitutional and statutory law, but they are few and far between compared to the rights of natural persons. For example, a corporation has the personal right to bring a lawsuit (as well as the capacity to be sued) and, like a natural person, a corporation can be libeled. But a corporation has no constitutional right to freely exercise its religion because religious exercise is something that only ‘’natural’’ persons can do. That is, only human beings, not business entities, have the necessary faculties of belief and spirituality that enable them to possess and exercise religious beliefs. Harvard College (a component of Harvard University), formally the President and Fellows of Harvard College (AKA the Harvard Corporation), is the oldest corporation in the western hemisphere. Founded in 1636, the second of Harvard’s two governing boards was incorporated by the Great and General Court of Massachusetts in 1650. Significantly, Massachusetts itself was a corporate colony at that time – owned and operated by the Massachusetts Bay Company (until it lost its charter in 1684) - so Harvard College was a corporation created by a corporation. Many nations have modeled their own corporate laws on American business law. Corporate law in Saudi Arabia, for example, follows the model of New York State corporate law. Corporate taxationIn many countries, including the United States and United Kingdom, 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 Australia 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. CriticismsAdam Smith in the Wealth of Nations criticised the corporate form because of the separation of ownership and management. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. Legal Scholar and Professor of Law at the University of British Columbia Joel Bakan describes the modern corporate entity as 'an institutional psychopath' and a 'psychopathic creature.' Bakan claims that corporations, when considered as natural living persons, exhibit the traits of antisocial personality disorder or psychopathy. Noam Chomsky, the MIT linguist and activist describes the corporate structure as being fascist: A corporation or an industry is, if we were to think of it in political terms, fascist; that is, it has tight control at the top and strict obedience has to be established at every level — there's a little bargaining, a little give and take, but the line of authority is perfectly straightforward.... I'd love to see centralized power eliminated, whether it's the state or the economy, and have it diffused and ultimately under direct control of the participants. Chomsky has also criticized the legal decisions that led to the creation of the modern corporation: Corporations, which previously had been considered artificial entities with no rights, were accorded all the rights of persons, and far more, since they are "immortal persons," and "persons" of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints. The concept of the corporation and its role in modern society was heavily criticized in the documentary film The Corporation. Other business entitiesAlmost every recognised 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:
Footnotes
References
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