Acorporation orbody corporate is an individual or a group of people, such as an association orcompany, that has been authorized by thestate to act as a single entity (a legal entity recognized by private and public law as "born out of statute"; alegal person in a legal context) and recognized as such inlaw for certain purposes.[1]: 10 Early incorporated entities were established bycharter (i.e., by anad hoc act granted by a monarch or passed by a parliament or legislature). Mostjurisdictions now allow the creation of new corporations throughregistration. Corporations come in many different types but are usually divided by the law of the jurisdiction where they are chartered based on two aspects: whether they can issuestock, or whether they are formed to make aprofit.[2] Depending on the number of owners, a corporation can be classified asaggregate (the subject of this article) orsole (a legal entity consisting of a single incorporated office occupied by a singlenatural person).
Registered corporations have alegal personality recognized by local authorities and their shares are owned by shareholders,[3][4] whose liability is generallylimited to their investment. One of the attractive early advantages corporations offered to theirinvestors, compared to earlier business entities likesole proprietorships andjoint partnerships, was limited liability. Limited liability separates control of a company from ownership and means that a passive shareholder in a corporation will not be personally liable either for contractually agreed obligations of the corporation, or fortorts (involuntary harms) committed by the corporation against a third party (acts done by the controllers of the corporation).[5]
Wherelocal law distinguishes corporations by their ability to issuestock, corporations allowed to do so are referred to asstock corporations; one type of investment in the corporation is through stock, and owners of stock are referred to asstockholders orshareholders. Corporations not allowed to issue stock are referred to asnon-stock corporations; i.e. those who are considered the owners of a non-stock corporation are persons (or other entities) who have obtained membership in the corporation and are referred to as amember of the corporation. Corporations chartered in regions where they are distinguished by whether they are allowed to be for-profit are referred to asfor-profit andnot-for-profit corporations, respectively.
Shareholders do not typically actively manage a corporation; shareholders instead elect or appoint aboard of directors to control the corporation in afiduciary capacity. In most circumstances, a shareholder may also serve as a director or officer of a corporation. Countries withco-determination employ the practice of workers of an enterprise having the right to vote for representatives on the board of directors in a company.
The word "corporation" derives fromcorpus, theLatin word for body, or a "body of people". By the time ofJustinian (reigned 527–565),Roman law recognized a range of corporate entities under the namesUniversitas,corpus orcollegium. Following the passage of theLex Julia during the reign ofJulius Caesar asConsul andDictator of theRoman Republic (49–44 BC), and their reaffirmation during the reign ofCaesar Augustus asPrinceps senatus andImperator of theRoman Army (27 BC–14 AD),collegia required the approval of theRoman Senate or theEmperor in order to beauthorized as legal bodies.[6] These included the state itself (thePopulus Romanus), municipalities, and such private associations as sponsors of areligious cult,burial clubs, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives.[7] Private associations were granted designated privileges and liberties by the emperor.[8]
Early entities which carried on business and were the subjects of legal rights included thecollegium ofancient Rome and thesreni of theMaurya Empire in ancient India.[11] In medieval Europe, churches became incorporated, as did local governments, such as theCity of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, theStora Kopparberg mining community inFalun,Sweden, obtained acharter from KingMagnus Eriksson in 1347.
Dutch and English chartered companies, such as theDutch East India Company (also known by its Dutch initials: VOC) and theHudson's Bay Company, were created to lead the colonial ventures of European nations in the 17th century. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company defeatedPortuguese forces and established itself in theMoluccan Islands in order to profit from theEuropean demand forspices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the originalAmsterdam Stock Exchange. Shareholders were also explicitly grantedlimited liability in the company's royal charter.[12]
In England, the government created corporations under aroyal charter or anAct of Parliament with the grant of amonopoly over a specified territory. The best-known example, established in 1600, was theEast India Company ofLondon.Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of theCape of Good Hope. Some corporations at this time would act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently, the company becameincreasingly integrated with English and later British military and colonial policy, just as most corporations were essentially dependent on theRoyal Navy's ability to control trade routes.
Labeled by both contemporaries and historians as "the grandest society of merchants in the universe", the English East India Company would come to symbolize the dazzlingly rich potential of the corporation, as well as new methods of business that could be both brutal and exploitative.[13] On 31 December 1600, Queen Elizabeth I granted the company a 15-year monopoly on trade to and from theEast Indies andAfrica.[14] By 1711, shareholders in the East India Company were earning areturn on their investment of almost 150 per cent. Subsequent stock offerings demonstrated just how lucrative the company had become. Its first stock offering in 1713–1716 raised £418,000, and its second in 1717–1722 raised £1.6 million.[15]
A similarchartered company, theSouth Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were supposedly backed by theTreaty of Utrecht, signed in 1713 as a settlement following theWar of the Spanish Succession, which gaveGreat Britain anasiento to trade in the region for thirty years. In fact, the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in Britain, enticed by extravagant promises of profit fromcompany promoters, bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) that it assumed thepublic debt of the British government. This accelerated the inflation of the share price further, as did theBubble Act 1720, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a royal charter. The share price rose so rapidly that people began buying shares merely in order to sell them at a higher price, which in turn led to higher share prices. This was the firstspeculative bubble the country had seen, but by the end of 1720, the bubble had "burst", and the share price sank from £1,000 to under £100. As bankruptcies and recriminations ricocheted through government and high society, the mood against corporations and errant directors was bitter.
Chart of theSouth Sea Company's stock prices. The rapid inflation of the stock value in the 1710s led to theBubble Act 1720, which restricted the establishment of companies without aroyal charter.
In the late 18th century,Stewart Kyd, the author of the first treatise oncorporate law in English, defined a corporation as:
a collection of many individuals united into one body, under a special denomination, havingperpetual succession under an artificial form, and vested, by the policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation or at any subsequent period of its existence.
— A Treatise on the Law of Corporations, Stewart Kyd (1793–1794)
Due to the late 18th century abandonment ofmercantilist economic theory and the rise ofclassical liberalism andlaissez-faire economic theory due to a revolution ineconomics led byAdam Smith and other economists, corporations transitioned from being government orguild affiliated entities to being public and private economic entities free of governmental directions.[16] Smith wrote in his 1776 workThe Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others' money would not exercise as much care as they would with their own.[17]
"Jack and the Giant Joint-Stock", a cartoon inTown Talk (1858) satirizing the 'monster' joint-stock economy that came into being after theJoint Stock Companies Act 1844
The BritishBubble Act 1720's prohibition on establishing companies remained in force until its repeal in 1825. By this point, theIndustrial Revolution had gathered pace, pressing for legal change to facilitate business activity.[18] The repeal was the beginning of a gradual lifting on restrictions, though business ventures (such as those chronicled byCharles Dickens inMartin Chuzzlewit) under primitive companies legislation were often scams. Without cohesive regulation, proverbial operations like the "Anglo-Bengalee Disinterested Loan and Life Assurance Company" were undercapitalized ventures promising no hope of success except for richly paid promoters.[19]
The process ofincorporation was possible only through aroyal charter or aprivate act and was limited, owing to Parliament's jealous protection of the privileges and advantages thereby granted. As a result, many businesses came to be operated asunincorporated associations with possibly thousands of members. Any consequentlitigation had to be carried out in the joint names of all the members and was almost impossibly cumbersome. Though Parliament would sometimes grant a private act to allow an individual to represent the whole in legal proceedings, this was a narrow and necessarily costly expedient, allowed only to established companies.
Then, in 1843,William Gladstone became the chairman of a Parliamentary Committee on Joint Stock Companies, which led to theJoint Stock Companies Act 1844, regarded as the first modern piece of company law.[20] The Act created theRegistrar of Joint Stock Companies, empowered to register companies by a two-stage process. The first, provisional, stage cost £5 and did not confer corporate status, which arose after completing the second stage for another £5. For the first time in history, it was possible for ordinary people through a simple registration procedure to incorporate.[21] The advantage of establishing a company as aseparate legal person was mainly administrative, as a unified entity under which the rights and duties of all investors and managers could be channeled.
However, there was still no limited liability and company members could still be held responsible for unlimited losses by the company.[22] The next, crucial development, then, was theLimited Liability Act 1855, passed at the behest of the then Vice President of the Board of Trade,Robert Lowe. This allowed investors to limit their liability in the event of business failure to the amount they invested in the company –shareholders were still liable directly tocreditors, but just for the unpaid portion of theirshares. (The principle that shareholders are liable to the corporation had been introduced in the Joint Stock Companies Act 1844.)
The 1855 Act allowed limited liability to companies of more than 25 members (shareholders).Insurance companies were excluded from the act, though it was standard practice for insurance contracts to exclude action against individual members. Limited liability for insurance companies was allowed by theCompanies Act 1862.
This prompted the English periodicalThe Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated."[23] The major error of this judgment was recognised by the same magazine more than 70 years later, when it claimed that, "[t]he economic historian of the future... may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trade corporations, a place of honour withWatt andStephenson, and other pioneers of the Industrial Revolution. "[24]
These two features – a simple registration procedure and limited liability – were subsequently codified into the landmark 1856Joint Stock Companies Act. This was subsequently consolidated with a number of other statutes in the Companies Act 1862, which remained in force for the rest of the century, up to and including the time of the decision inSalomon v A Salomon & Co Ltd.[25]
The legislation quickly led to a railway boom, resulting in a surge in the formation of companies. However, in the later nineteenth century, a period of depression set in, causing many of these companies to collapse and become insolvent. Strong academic, legislative, and judicial opinions emerged, opposing the notion that businessmen could escape accountability for their role in the failing businesses.
In 1892,Germany introduced theGesellschaft mit beschränkter Haftung with a separatelegal personality and limited liability even if all the shares of the company were held by only one person. This inspired other countries to introduce corporations of this kind.
The last significant development in the history of companies was the 1897 decision of the House of Lords inSalomon v. Salomon & Co., where the House of Lords confirmed the separate legal personality of the company, and that the liabilities of the company were separate and distinct from those of its owners.
In theUnited States, forming a corporation usually required an act of legislation until the late 19th century. Many private firms, such asCarnegie's steel company andRockefeller'sStandard Oil, avoided the corporate model for this reason (as atrust). State governments began to adopt more permissive corporate laws from the early 19th century, although these were all restrictive in design, often with the intention of preventing corporations from gaining too much wealth and power.[26]
In 1896,New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state.[27] In 1899, Delaware followed New Jersey's lead by enacting an enabling corporate statute. However, Delaware only emerged as the leading corporate state after the enabling provisions of the 1896 New Jersey corporate law were repealed in 1913.[26]
The end of the 19th century saw the emergence ofholding companies and corporatemergers creating larger corporations with dispersed shareholders. Countries began enactingantitrust laws to prevent anti-competitive practices and corporations were granted more legal rights and protections. The 20th century witnessed a proliferation of laws allowing for the creation of corporations through registration worldwide. These laws played a significant role in driving economic booms in many countries both before and after World War I. Another major post World War I shift was toward the development ofconglomerates, in which large corporations purchased smaller corporations to expand their industrial base.
Starting in the 1980s, many countries with large state-owned corporations began moving towardprivatization, which involved selling publicly owned (or 'nationalized') services and enterprises to corporations.Deregulation aimed at reducing the regulation of corporate activity, often accompanied privatization as part of a laissez-faire policy.
A corporation is, at least in theory, owned and controlled by its members. In ajoint-stock company, the members are known as shareholders, and each of their shares in the ownership, control, and profits of the corporation is determined by the portion of shares in the company that they own. Thus, a person who owns a quarter of the shares of a joint-stock company owns a quarter of the company, is entitled to a quarter of the profit (or at least a quarter of the profit given to shareholders as dividends) and has a quarter of the votes capable of being cast at general meetings.
In another kind of corporation, the legal document which established the corporation or which contains its current rules will determine the requirements for membership in the corporation. What these requirements are depends on the kind of corporation involved. In aworker cooperative, the members are people who work for the cooperative. In acredit union, the members are people who have accounts with the credit union.[28]
The day-to-day activities of a corporation are typically controlled by individuals appointed by the members. In some cases, this will be a single individual but more commonly corporations are controlled by a committee or by committees. Broadly speaking, there are two kinds of committee structure.
A single committee known as aboard of directors is the method favored in mostcommon law countries. Under this model, the board of directors is composed of both executive and non-executive directors, the latter being meant to supervise the former's management of the company.
Historically, corporations were created by a charter granted by the government. As explained above, such charters were often enacted asprivate bills.
Today, a corporation is formed, orincorporated, by registering with the state, province, or national government and regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation's assumption of limited liability. The law sometimes requires the corporation to designate its principal address, as well as aregistered agent (a person or company designated to receive legal service of process). It may also be required to designate anagent or other legal representatives of the corporation.[citation needed]
Generally, a corporation filesarticles 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 createbylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.
In theory, a corporation cannot own its own stock. An exception istreasury stock, where the company essentially buys back stock from its shareholders, which reduces its outstanding shares. This essentially becomes the equivalent of unissued capital, where it is not classified as an asset on the balance sheet (passive capital).
Under theinternal affairs doctrine, the law of the jurisdiction in which a corporation is incorporated will govern its internal activities—that is, conflicts between shareholders and managers such as the board of directors and corporate officers.[30] If a corporation operates outside its home state, it is usually required to register with other governments as aforeign corporation and must formally appoint aregistered agent to accept service of process within such other jurisdictions.[30] A foreign corporation is almost always subject to the laws of its host state pertaining to external affairs such asemployment,crimes,contracts,civil actions, and the like.[citation needed]
Corporations generally have a distinct name. Historically, some corporations were named after the members of their boards of directors: for example, the "President and Fellows of Harvard College" is the name of one of the two governing boards ofHarvard University, but it is also the exact name under which Harvard was legally incorporated.[31] Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to the members of their boards. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers based on a registration number (for example, "12345678 Ontario Limited"), which is assigned by the provincial or territorial government where the corporation incorporates.
In most countries, corporate names include a term or an abbreviation that denotes the corporate status of the entity (for example, "Incorporated" or "Inc." in the United States) or the limited liability of its members (for example, "Limited", "Ltd.", or "LLC").[32][33] These terms vary by jurisdiction and language. In some jurisdictions, they are mandatory, and in others, such as California, they are not.[33][34] Their use puts everybody onconstructive notice that they are dealing with an entity whoseliability is limited: one can only collect from whatever assets the entity still controls when one obtains a judgment against it.
Corporate names are supposed to be unique to the jurisdiction in which the corporation is registered.[35] Governments will not allow another corporation or any other kind of legal entity to register a name that is too similar to the name of an existing corporation.[35] However, since "different states may register entities with the same names, a corporate name is a unique identifier only when combined with the name of the state of incorporation".[35] This explains why lawyers in legal papers often expressly refer to a corporation's state of incorporation after the first mention of its name.[35]
Some 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 some other form of collective ownership (in the United States it can be used by asole proprietorship but this is not generally the case elsewhere).[citation needed]
Despite not being human beings, corporations have been ruledlegal persons in a few countries, and have many of the same rights asnatural persons do. For example, a corporation can own property, and can sue or be sued for as long as it exists. Corporations can exercisehuman rights against real individuals and the state,[36][37] and they can themselves be responsible for human rights violations.[38] Corporations can be "dissolved" either by statutory operation, the order of the court, or voluntary action on the part of shareholders.Insolvency may result in a form of corporate failure, when creditors force the liquidation and dissolution of the corporation under court order,[39] but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of special criminal offenses in the UK, such asfraud andcorporate manslaughter. However, corporations are not considered living entities in the way that humans are.[40]
Legal scholars and others, such asJoel Bakan, have observed that a business corporation created as a "legal person" has apsychopathic personality because it is required to elevate its own interests above those of others even when thisinflicts major risks and grave harms on the public or on other third-parties. Such critics note that the legal mandate of the corporation to focus exclusively on corporate profits and self-interest often victimizes employees, customers, the public at large, and/or thenatural resources.[41] The political theoristDavid Runciman notes that corporate personhood forms a fundamental part of the 21st century conception of thestate, and believes the idea of the corporation as a legal person can help to clarify the role of citizens as politicalstakeholders, and to break down the sharp conceptual dichotomy between the state and the people or the individual, a distinction that, in his account, is "increasingly unable to meet the demands placed on the state in the modern world".[42]
^Hirst, Scott (2018-07-01)."The Case for Investor Ordering".The Harvard Law School Program on Corporate Governance Discussion Paper.2017–13.Archived from the original on 2021-01-17. Retrieved2020-11-16.
^Pettet, B. G. (2005).Company Law. Pearson Education. p. 151.Reading the above, makes it possible to forget that the shareholders are theowners of the company.
^Courtney, Thomas B. (2002).The Law of Private Companies (2nd ed.). Bloomsbury Professional. 4.001.
^Harold Joseph Berman,Law and Revolution (vol. 1): The Formation of the Western Legal Tradition, Cambridge: Harvard University Press, 1983, pp. 215–216.ISBN0-674-51776-8
^Prakash, Om (1998).European Commercial Enterprise in Pre-Colonial India. Cambridge: Cambridge University Press.
^Keay, John (1991).The Honorable Company: A History of the English East India Company. New York: MacMillan.
^Cohen-Vrignaud, Gerard; Metz, Stephanie; Dunville, Jody; Heath, Shannon; McLeod, Julia P.; Powell, Kat; Robida, Brent; Stromski, John; Haynes, Brandon."British East India Company". Archived fromthe original on 20 December 2016. Retrieved19 January 2017.
^abSmiddy, Linda O.; Cunningham, Lawrence A. (2010),Corporations and Other Business Organizations: Cases, Materials, Problems (Seventh ed.), LexisNexis, pp. 228–231, 241,ISBN978-1-4224-7659-8
^California does not require corporations to indicate corporate status in their names, except for close corporations. The drafters of the 1977 revision of the California General Corporation Law considered the possibility of forcing all California corporations to have a name indicating corporate status, but decided against it because of the huge number of corporations that would have had to change their names, and the lack of any evidence that anyone had been harmed in California by entities whose corporate status was not immediately apparent from their names. However, the 1977 drafters were able to impose the current disclosure requirement for close corporations. See Harold Marsh, Jr., R. Roy Finkle, Larry W. Sonsini, and Ann Yvonne Walker,Marsh's California Corporation Law, 4th ed., vol. 1 (New York: Aspen Publishers, 2004), 5–15 — 5–16.
^Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993) discusses the controversial nature of additional rights being granted to corporations.
^See, for example, the Business Corporations Act (B.C.) [SBC 2002] chapter 57, Part 10
Sobel, Robert.The Age of Giant Corporations: A Microeconomic History of American Business. (1984)
Tooze, Adam, "Democracy and Its Discontents",The New York Review of Books, vol. LXVI, no. 10 (6 June 2019), pp. 52–53, 56–57. "Democracy has no clear answer for the mindless operation ofbureaucratic andtechnological power. We may indeed be witnessing its extension in the form ofartificial intelligence androbotics. Likewise, after decades of dire warning, theenvironmental problem remains fundamentally unaddressed.... Bureaucratic overreach and environmental catastrophe are precisely the kinds of slow-moving existential challenges that democracies deal with very badly.... Finally, there is the threat du jour: corporations and the technologies they promote." (pp. 56–57.)
