The Rise of the Corporation

Chapter 7

Nature of a Corporation

At its simplest, a corporation is an artificial person.

Unlike all other business models, the corporation has rights similar to that of a human being.

A corporation can own property, pay taxes, exist for an indefinite period, sue, and be sued (Am. Jur. Corporations § 1).

In 1819, the United States Supreme Court defined a corporation as an artificial being that is invisible, untouchable, and exists only in the theory of the law (Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819)).

The definition has expanded considerably since that time.

First and foremost, a corporation is created by statute (Woodale, Inc. v. Fidelity & Deposit Co., 378 F.2d 627 (8th cir. 1967)).

Its existence, authority to act, and dissolution are all controlled by statutory law.

Statutes give corporations the power to own property, pay taxes, and many of the actions normally associated with a human being.

Corporations have a separate identity from the people who created them.

Even when the original creators die or leave the company, the corporation will continue to exist.

A corporation can only function through its

agents, directors, and officers, but the identity of these individuals is not important.

They can come and go, but the corporation will continue to exist as long as there is someone who can act on its behalf.

Corporations’ Limited Liability

The corporation was the first to adopt the important protection of limited liability.

Corporate stockholders are not personally liable for the acts or obligations of the corporation. They are protected by limited liability. (18 AmJur2d § 850)

A corporation must act through its employees, agents, officers, and directors (State v. Luv Pharmacy, Inc., 118 N.H. 398, 388 A.2d 190 (1978)).

These individuals are important members of a corporation, but the corporation exists separately from them.

When it owns property, the corporation does so in its own name.

A Corporation Consists of: Shareholders: A person who owns shares in a

corporation.

Officers: An individual hired or selected by a board of directors who has specific authority, such as the ability to bind the corporation to contracts and other agreements, and who carries out the day-to-day activities of the business.

Directors: Individuals who set policy and long-

term goals for corporations.

The Elements of a Corporation A legally constituted corporation has some basic elements. For instance, a corporation can:

Exist perpetually

Sue or be sued

Acquire and hold property in its own right

Make laws that regulate its own behavior (St. Lawrence University v. Trustees of Theological School of St. Lawrence University, 20 N.Y.2d 317, 282 N.Y.2d 746 (1967)).

Corporations HavePerpetual Existence

Corporations do not die. They have no set expiration date.

This does not mean that every corporation that has ever been created is still in existence today.

Corporations can terminate through bankruptcy, dissolution, or other actions.

However, corporations are not created with a termination date in mind.

Corporations Can Sue or Be Sued

Like a human being, a corporation can sue for violation of a contract or almost any other action.

Similarly, they can also be sued.

When a corporation is sued and the suit is successful, the corporation’s assets may be seized to satisfy the judgment.

However, the personal assets of the individual shareholders, officers, and directors are not subject to seizure.

Corporations Can Own Property

Unlike most other business types, corporations can own property in their own right.

This concept originated with corporations.

Corporate Bylaws and Articles of Incorporation

The document that creates the basic structure of the corporation is the Articles of Incorporation.

A corporation can also establish bylaws that control the day-to-day operations of the business and establish policies for such things as negotiating contracts, hiring employees, disbursing funds, and many other issues.

A Short History of Corporations in the United States

By 1870, corporate law had taken a commanding presence in the legal field and has remained so ever since.

The reason for this is simple: Corporate structure allowed entrepreneurs and capitalists the best structure to amass enormous wealth and property (Lawrence Friedman, A History of American Law, Simon & Schuster 1973).

Corporations became such a powerful vehicle that people in society began to worry about this concentration of power in the hands of so few.

Huge corporations, such as United States Steel Corporation or Standard Oil Company, established monopolies in various industries.

These monopolies engaged in unfair and deceptive trade practices, crippled competitors, and essentially set whatever price they wished for the products that they sold.

Monopolies?

A monopoly controls all aspects of a particular industry. It can force consumers to pay any price it wishes,

especially when the monopoly is in an area such as oil production.

Monopolies would engage in practices such as “cutthroat competition” where they would lower the prices of their goods to a point that no one else could compete.

Then, when competitors had either been bought up or gone out of business, the monopoly could raise prices as high as it liked.

Whether called "trusts" or "monopolies," the basic idea was the same: A small group of individuals would completely take over a particular industry and dictate transportation, supply, and labor costs, while simultaneously wiping out all competitors.

The earliest legislation to recognize the growing danger of monopolies was the Sherman Antitrust Act.

The Sherman Antitrust Act

The Sherman Antitrust Act was passed in 1890 as one of the first federal legislative attempts to regulate the power of corporations in the United States.

The Act specifically prohibited “cutthroat competition” and any other practice that sought to “restrain trade or commerce” (Appalachian Coals, Inc. v. United States, 288 U.S. 344 (1933)).

The primary goal of the Act was to stop practices that destroyed competition.

Public and Private Corporations

There are two general types of corporations:

Public corporations are closely associated with governmental agencies.

Private corporations are in the business of making money or carrying out some private concern, such as charity work.

Public Corporations A public corporation furthers government affairs

and is often created by special state legislation.

Examples of public corporations include: Care for state property, such as parks and

wildlife sanctuaries Promote education, such as colleges,

universities, and schools

The distinction between public and private corporations is important.

Public corporations are usually not bound by the same set of rules and statutes as private corporations.

Public corporations are often given special tax treatment and other benefits that private corporations do not receive.

Public corporations are designed to carry out a public purpose and therefore receive some benefit for this function.

Quasi-Public Corporations A company that was originally created as a

private corporation, but after taking on a governmental function, has been reclassified.

A good example of this type of corporation is the public service corporation.

Public service corporations were not originally created to serve as public corporations but have received a special commission or made a unique arrangement with the government to provide a service.

Examples of quasi-public corporations include:

Telephone companies

Electric companies

Companies that provide ambulance and other emergency services

Nonprofit Corporations Nonprofit corporations are generally designed to carry

out a public purpose or for charity.

Whatever their purpose, nonprofit corporations must meet one very important requirement: They cannot distribute profits to members.

If none of the income generated by the corporation is distributed among its shareholders, officers, or directors, then it is a nonprofit corporation (Summers v. Cherokee Children & Family Services, Inc., 112 S.W.3d 486 (Tenn. 2002).

When a corporation is classified as a nonprofit, it receives special advantages.

For instance, a nonprofit corporation: Pays few taxes Receives unemployment insurance breaks Receives special protections in bankruptcy Has reduced Social Security obligations Receives special protections in the areas of

copyright, antitrust, and customs, among many others

Determination of aCorporation’s Status

The simple way to distinguish a public corporation from a private corporation is to examine its charter and articles of organization.

These documents will determine whether a corporation is public or private.

Private Corporations A private corporation consists of the features

previously discussed.

They have shareholders, directors, and officers; exist perpetually; pay taxes on earnings; and can sue and be sued.

A private corporation is organized around its articles of incorporation and comes into existence when it satisfies all statutory requirements and files the appropriate documentation with the state.

Closely Held Corporation

A small company owned and managed by its shareholders.

Derives its authority from statutes, not the agreement among the owners.

Must file with the state.

Must abide by statutory regulations.

Elements of a Closely Held Corporation

Most states will rule that a closely held corporation has been created when:

There is no ready market for the company’s stock.

All or nearly all of the stockholders participate in the management, direction, and operations of the corporation (Am. Jur. Corporations § 38).

All stockholders are concentrated in one geographic area (111 A.L.R. 5th 207).

The company has filed as a closely held corporation.

Importance of the Distinction of “Closely Held” Corporation

Under traditional corporate law analysis, small corporations might run into trouble with state corporate laws.

For instance, corporate statutes require that board members must meet certain obligations.

A corporation that fails to meet these obligations faces the possibility of judicial dissolution.

This led many state legislatures to amend their corporate statutes to include a looser definition of corporation or to enact closely held corporate company provisions that allowed what was essentially a general partnership to form as a corporation (Karjala, An Analysis of Close Corporation Legislation in the United States, 21 Ariz. St. L.J. 663).

Sub-Chapter S Corporations

“Sub-chapter S" refers to the tax code that authorized the designation which allows a shareholder to avoid the infamous double taxation often seen in other corporate models.

“Sub-chapter S” corporations avoid double taxation by allowing corporations to pass profits directly to shareholders who then declare them as income.

Professional Corporations

A special corporate structure reserved for individuals who can only practice their profession after receiving a license from the state.

Summary

A corporation is an artificial person that has the right to own property, hire employees, bring lawsuits, and pay taxes.

Corporations are the product of state legislation.

By the end of the 1800s, society began to see corporations as a threat, and Congress responded with legislation known as the Sherman Antitrust Act.

The Sherman Antitrust Act prohibited cutthroat competition and many of the other unfair practices that corporations were using to wipe out their competitors.

The creation of the Federal Trade Commission and its Antitrust Division firmly established the role of the federal government in regulating corporations.

Summary

Public corporations are institutions devoted to governmental projects or policies.

Private corporations are engaged in businesses and usually run forprofit.

A type of private corporation, the closely held corporation resembles a partnership in many ways.

Nonprofit corporations carry out charities and are not allowed to distribute profits to its members.

Summary

Corporations are unlike most other types of business models in that they provide complete protection to owners and investors in the form of limited liability.

They are a powerful organizational model and are very effective in carrying out business transactions.

Summary