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A small business has the option of incorporating at the beginning of its existence or after years of doing business. Once it incorporates, it has two choices: to be a regular C corporation by default or to elect S corporation status, a name derived from Subchapter S of the Internal Revenue Code. This status was derived in an effort to make incorporating more attractive to small businesses and allow them to enjoy some of the benefits of corporate status while avoiding some of the drawbacks. While most small businesses are eligible for S status, there are some requirements that must be met, such as limitations on the number and kind of stockholders the corporation may have.

In Choosing a Legal Structure for Your Business, Stuart Handmaker explains that "Essentially, there isn't any difference between a C corporation and an S corporation. Each of them is a corporation, and each one has the same characteristics, shareholders, directors, officers, records, minute books, problems, and the like. The only real difference is that the S corporation has filed a special form with the Internal Revenue Service stating that it wants to be an S corporation."

What makes the S corporation different from the C corporation, then, is that it has special status in the eyes of the IRS. In short, the S corporation is viewed as a partnership or sole proprietorship for taxation purposes. This means that the corporation itself is not taxed, as C corporations are; rather the S corporation's profits are passed on to its shareholders, who pay income tax on that money. In nearly all other respects, though, the S corporation is essentially the same as the C corporation. Most importantly, S corporations receive the benefit of limited liability that goes along with being a corporation. The combined benefits of limited liability (the lack of which is the main drawback of partnerships or sole proprietorships) and avoidance of double taxation (the main drawback of C corporations) makes the S corporation the most popular legal structure amongst small business owners.

Becoming an S Corporation

FILING WITH THE INTERNAL REVENUE SERVICE. Once a business has gone through the procedure of becoming a corporation by filing the articles of incorporation, etc., it can elect S corporation status by filing form 2553 with the IRS. All of the corporation's shareholders must sign this form or file special shareholder consent forms. These rules apply to anyone who has held stock in the company during the current tax year. To be eligible for S corporation status for the current tax year, a corporation must file the form by the fifteenth day of the third month of the corporation's tax year. Once the form has been filed, it is not necessary to file every year.

ELIGIBILITY. For a corporation to be eligible for S corporation status, the following conditions must be met and maintained:

• The business must have become a corporation prior to filing for S corporation status. See "Incorporation" for more information on this process.
• The business must also have no more than 75 stockholders. Until the Small Business Job Protection Act of 1996 was passed, corporations with more than 35 shareholders were disqualified, but now the limit is 75, allowing most small businesses to fall within the guidelines.
• All of the business's stock must be owned by individuals who reside in or are citizens of the United States. Estates or trusts may be allowed as stockholders, but corporate or foreign investors are not allowed. This includes other businesses that are not corporations, such as partnerships or sole proprietorships. This provision, therefore, excludes corporate subsidiaries from claiming S corporation status.
• The business must issue only one class of stock. This means that with the purchase of stock must come the same economic rights, such as receiving dividends or compensation in the event of liquidation at the same time and in the same amount per share as all other shareholders. Voting rights may differ amongst the shareholders without being considered a sign of the possession of different classes of stock.

INELIGIBLE BUSINESSES. Those businesses that are ineligible for S corporation status include:

• All financial institutions, such as banks and savings and loans
• Insurance companies
• Businesses that receive 95 percent or more of their gross income from exports (also known as DISCs, Domestic International Sales Corporations)
• Corporations that use the possessions tax credit
• C Corporations that have been S corporations within the last five years

Benefits of S Corporation Status

LIMITED LIABILITY. Like C corporations, S corporations are considered to be separate entities apart from their owners for all purposes except taxation. This means that debts incurred by the corporation are the responsibility of the corporation, not its shareholders, who can only be held accountable up to the amount they invested in the corporation. If the corporation does not possess enough assets to pay its debts, the shareholders will not be required to make up the difference out of their own pockets. In addition, if the corporation is sued, liability rests on the shoulders of the corporation, not its shareholders.

AVOIDING DOUBLE TAXATION. According to the Internal Revenue Service, an S corporation is not a separate taxable entity. Instead, the corporation's profits are considered to be the shareholders' income (whether the money is distributed or not). Therefore, the corporation's earnings turn up on the shareholders' personal federal tax returns, the amount of which must be proportional to their share of stock. This can be a beneficial arrangement for many small businesses, because the money is taxed only once on the federal level. (State and local taxes may still be levied against the corporation.)

C corporations, on the other hand, are required to pay a federal corporate tax on all profits, and then the shareholders must pay income taxes on their share of dividends that are distributed once the corporation tax has been deducted. In essence, then, that money has been taxed twice. In the case of businesses that intend to leave most of the profits in the corporation or reinvest significant portions of the profits back into the business, though, C corporation status may be preferential if the corporate tax bracket is lower that your personal tax rate. But for companies that plan to pay shareholders all or most of the profits, S corporation status helps them avoid double taxation.

Professional corporations may also desire to elect S corporation status as they are often taxed at a higher rate than a regular C corporation. In addition, corporations that plan to conduct business in more than one state will find it easier to register to do so as an S corporation than as a C corporation. In the case of asset liquidation, S corporation status can also be a benefit because the appreciated value is taxed only on the shareholders' personal income tax. In the case of C corporations, the sale of appreciated assets can result in double taxation because the profit is taxed to the corporation and then to the shareholders to whom it is distributed.

LOSSES AS PERSONAL DEDUCTIONS. When an S corporation ends the year with a loss, that loss appears on the shareholders' personal income tax returns, just like profits do. This can mean substantial savings for shareholders, who will end up owing less (or even no) taxes after they deduct their share of the corporation's loss (proportional to their share of stock). In fact, many new small businesses that expect to start off with a loss elect S status so that they will receive this tax credit.

Drawbacks of S Corporation Status

RECORDKEEPING AND ATTENTION TO DETAIL. Because an S corporation is still a corporation, it requires owners to pay careful attention to the details of recordkeeping. In some cases, businesses that did file for S corporation status have not been viewed as such by the courts because they failed to act like corporations. In other words, some small businesses simply apply for the status in hopes of gaining limited liability protection, but they fail to keep separate personal and corporate accounts, for example, or to hold regular director's and shareholders' meetings and take minutes, all of which are requirements for corporations. They may also neglect to change their name to reflect their new corporate status in an effort to avoid the extra cost of ordering new stationary and business cards and changing their sign. As a result, the owners of such companies have been known to be found personally liable just as if their business was a sole proprietorship or partnership.

Simply filing the articles of incorporation does not guarantee limited liability. Moreover, an S corporation may be reverted to C corporation status if it fails to continually meet the eligibility requirements, another factor which requires attention to detail. The sale of stock to one foreign investor, for example, could mean the termination of S corporation status, and once a corporation reverts to C corporation status, it is not eligible to file for S status for another five years. This could be a costly error. Simply filing for S corporation status, therefore, does not guarantee protection from double taxation.

DOUBLE TAXATION FOR COMPANIES SWITCHING FROM C STATUS. Businesses that start out as C corporations and change their status to that of S corporations may still be taxed as corporations if certain conditions exist. Corporations switching status from C to S and possessing capital gains, excessive passive investment gains, investment tax credits, or liquidations may be still be subject to double taxation.

FRINGE BENEFITS. Unlike C corporations—but like partnerships—S corporations are not allowed to deduct fringe benefits given to shareholders who are employees as a business expense. As a result, shareholder-employees must pay taxes on those benefits. These rules apply to all shareholders who own more than two percent of the corporation's stock and are employees of the corporation. All non-shareholder employees, though, may receive benefits without paying taxes.

STOCK LIMITATIONS. To remain eligible for S corporation status, a corporation is only allowed to issue one class of stock, which may be a deterrent to businesses that would like to issue preferred as well as common stock. In addition, a limit of 75 stockholders is placed on the S corporation, and all stockholders must be individuals who reside in or are citizens of the United States. The small business corporation, therefore, is denied the benefit of foreign investors in an increasingly global business world.

Terminating S Corporation Status

It is possible for an S corporation to voluntarily revoke its status if it finds that S status is no longer beneficial, or to lose the status involuntarily. In the first case, a majority of the stockholders is required to make the decision, and a simple notification to the IRS is all that is required. In the second case, any act which disqualifies the corporation's eligibility for S status will result in the termination of that status effective on the date that the infraction occurs. In either case, the corporation becomes a C corporation in the absence of S corporation status.

Further Reading:

Colville, John. "Incorporation: Pros and Cons." Accountancy. July 2000.

Cooke, Robert A. How to Start Your Own (Subchapter) S Corporation. John Wiley & Sons, 1995.

Daughtrey, Zoel W., and Frank M. Messina. "Entity Choice Comparisons." CPA Journal. November 2000.

Goldstein, Arnold S. Starting Your Subchapter "S" Corporation. John Wiley & Sons, 1988.

Handmaker, Stuart A. Choosing a Legal Structure for Your Business. Prentice Hall, 1997.

Lee, Mie-Yun. "Incorporating Can Pave the Way to Profitability." Washington Business Journal. September 8, 2000.

Nichols, Ted. How to Form Your Own "S" Corporation and Avoid Double Taxation. Upstart Publishing, 1995.

Selecting the Legal Structure for Your Business Small Business Administration. n.d.

See also: C Corporation; Incorporation; Professional Corporation

noun

A commercial organization: business, company, concern, enterprise, establishment, firm, house. Informal outfit. See group.

Corporation law has traditionally been the domain of state legislatures and state courts, although nothing in the Constitution prohibits a federal role in corporate governance. The influence of the United States Supreme Court on corporation law until recently has therefore been decidedly secondary to that of the state courts, especially those of Delaware and New York. Nevertheless, before World War II, several Supreme Court decisions had momentous consequences for the place of corporations in American society. Since 1950, the Court has come to exercise an ever‐expanding influence on corporation law, due partly to the impact of securities regulation on corporate affairs and partly to an increasing nationalization of corporation law.

Dartmouth College v. Woodward (1819) marked the debut of the private profit‐making corporation because it extended the protection of the Contracts Clause of Article I, section 10 of the Constitution to corporate charters, treating them as contracts between the state and entrepreneurs. Dartmouth College prevented arbitrary state interference with charters, thereby giving some security to investors. Charles River Bridge v. Warren Bridge (1837) contributed a salutary counterpoise to Dartmouth College because of Chief Justice Roger B. Taney's insistence that states could reserve a right to amend the charter when they issued it. Taney refused to read implied grants of monopolies into charters, thereby establishing a creative balance between the demands of investors and the need for state regulatory power. In McCulloch v. Maryland (1819), Chief Justice John Marshall upheld the power of Congress to charter banking corporations as one of the implied powers that Alexander Hamilton had identified in his 1791 arguments on the constitutionality of the bill to charter the first Bank of the United States.

For a century after Charles River Bridge, the Supreme Court had little direct involvement with the law of corporations, except for the offhand dictum of Chief Justice Morrison R. Waite in Santa Clara County v. Southern Pacific Railroad (1886) that corporations were “persons” within the meaning of the Fourteenth Amendment's Equal Protection Clause. The Court's various substantive due process and freedom of contract decisions between 1890 and 1937 strengthened the hand of corporations in their dealings with employees, unions, consumers, and state legislatures. Another instance of constitutional protection for the corporate entity came in First National Bank v. Bellotti (1978), where the Court extended the First Amendment's protection to corporate political speech.

The expansion of various bodies of federal law after World War II has had an extensive impact on corporations. Because federal courts have exclusive jurisdiction of cases under the Securities Exchange Act of 1934 and concurrent jurisdiction with state courts over nearly all the remainder of federal securities statutes, the Supreme Court has had an immeasurable influence on the securities‐regulation domain of corporation law (e.g., the definition of insider trading in cases like Chiarella v. United States, 1980). In J. I. Case Co. v. Borak (1964), a proxy solicitation case, the Supreme Court created the implied private right of action and the role of “private attorney general,” greatly enhancing the enforceability of federal securities statutes. In a bankruptcy case, Taylor v. Standard Gas & Electric Co. (1939), the Court invented the so‐called Deep Rock doctrine, which subordinated the debt claims of a corporate shareholder to the claims of outside creditors.

Extensive criticism of state regulatory law, especially Delaware's, led to demands for federal corporation law—statutory, administrative, common law, or a combination of all three—in the 1960s and 1970s. The Supreme Court emphatically rebuffed attempts to accomplish this through expansion of the SEC's rule 10b‐5 prohibition of fraud in Santa Fe Industries v. Green (1977), thus reaffirming the primacy of the states in all aspects of corporate governance except securities regulation.

While eschewing responsibility for the law of corporations directly, the Court has considerably affected the development of that law in cases involving the rights of corporations or those who deal with them.

See also Capitalism; Private Corporation Charters.

Bibliography

• Robert C. Clark, Corporate Law (1986)

— William M. Wiecek

A group of people legally authorized to act as if it were a single person. Once such a group with a common purpose is incorporated, whether by royal charter (the Hudson's Bay Company (1670), or the British Broadcasting Corporation (1926) ), or under successive facilitatory Companies Acts of the kind passed in Anglo-Saxon legal systems since the middle of the nineteenth century, it has legal personality. This means that it can sue and be sued in the courts as though it were an individual. Under British law an office held by an individual may also be corporate in character, to allow distinction in law between, for example, the Crown and the reigning monarch. There are in addition some bodies, notably trade unions and quangos, which have from time to time enjoyed effective corporate status under different legal instruments. Together these form the chief institutions of mediation between individual and state under corporatism. In Britain the term is now much less frequently used than in the past to refer to local government authorities—perhaps in recognition of their diminished autonomy—and has therefore become virtually synonymous with the incorporated business firm or company. Originally devised in early modern Europe chiefly to permit provision of utilities or services of a clearly public character (banking, insurance, the defence of a trade route, or consular and diplomatic services), incorporation is now almost universally linked to the principle of limited liability of shareholders and is resorted to for the whole range of enterprises undertaken for profit, whether or not they have strong public implications.

— Charles Jones

A corporation is an independent entity: it exists separately from its owners, the shareholders. Most corporations are businesses for profit that raise capital for corporate activities by selling shares of stock, which represent ownership and are transferable. There are also charitable, cooperative, municipal, and religious corporations, all of which have distinctive features. A corporation's shareholders elect the board of directors that hires the corporation's officers, who run the day-to-day business. For many purposes, the corporation is treated as if it were a person. The corporation can sue or be sued, enter into legally binding agreements, and own property.

One important element of the corporate form is that it allows for limited liability. The liability of individual shareholders is limited to the amount they actually invested, even if the corporation runs up large debts. However, there are extreme cases in which shareholders can be held liable for the acts of a corporation—a situation called "piercing the corporate veil." American courts have developed several criteria in determining whether or not to pierce the corporate veil. One factor the courts consider is whether the corporate action involves a contract or personal injury–type action, in which case the person affected normally has no choice but to deal with the corporation. The courts may also hold shareholders liable for corporate actions when the shareholders are involved in fraud or some other wrongdoing, such as siphoning off company profits. This occurs most often in closely held corporations, with very few shareholders and in which the majority shareholder plays a substantial role in company management. Other occasions on which courts have held shareholders liable are when the corporation was knowingly undercapitalized and when it failed to follow normal corporate formalities, such as issuing stock or keeping corporate meeting minutes.

One benefit that corporations provide is that they are freely transferable, with ownership interests in the corporation represented by shares that can be sold quickly and easily, without many limitations.

Origins of the Modern Corporation

The modern corporate form is a combination of two historical types of companies: the joint-stock company, actually a partnership between shareholders, and the traditional corporations that had originally been developed for medieval guilds, municipalities, monasteries, and universities in England. The first American corporations were monopolies chartered by the English Crown in the sixteenth century, with the intent of pursuing profit in the New World. Before the American Revolution, the London and Plymouth companies, Massachusetts Bay Company, and Hudson's Bay Company played a large role in establishing and supporting the European colonies. The royal charter of these companies allowed them to control governmental functions like customs regulation and terms of trade, as well as the formulation of foreign policy within their jurisdictions.

In the eighteenth century, corporations' exercise of essential government functions was curtailed and courts began to hold that the trade monopolies excluded fair competition from other incorporated companies. However, since companies who were incorporated at that time could lawfully compete with the monopolies, a great deal of economic activity was organized by single proprietors or partnerships under existing contract and property common law.

State Control of Incorporation

After 1776, the power to grant incorporation moved from the Crown to individual state legislatures. The interstate commerce clause in the U.S. Constitution granted incorporators the freedom to incorporate in one state without limiting their ability to transact business in other states. States eventually began to compete, liberalizing their laws to attract more requests for incorporation.

At first states passed a special act for each incorporation, but in 1811 New York enacted a general incorporation law that enabled the secretary of state to grant charters. The general incorporating statute enacted by New York was of limited application. The Connecticut incorporating act of 1837 was broader and more flexible, and New Jersey went on to create an incorporating act in 1875 that included a number of the provisions businesses had long sought from other states. But the privileges granted by corporate charters remained insufficient to facilitate the centralization of manufacturing that some businesses desired. In response, New Jersey enacted laws greatly liberalizing its 1875 act.

In the Dartmouth College Case of 1819 (Trustees of Dartmouth College v. Woodward), the Supreme Court held that an incorporation charter was a binding contract between a state and a corporation. Thus, the charter could not be altered without the corporation's consent. Since that decision, however, few perpetual charters have been granted and states have specifically reserved the right to alter or annul incorporation charters.

Individuals wishing to incorporate a business, or incorporators, must file an official document—called the articles of incorporation—with the secretary of state and pay a filing fee. The articles of incorporation must contain the corporation's name, a purposes clause, and form of capitalization (the number of shares the company plans to issue). Until the late 1880s, corporations were created for very limited and well-defined purposes, and the articles of incorporation would explain their corporate structure in great detail. In addition, the incorporators were forced to prove to the legislature that the corporation would serve a public purpose, should the state grant them the right to incorporate. In the twentieth century, though, corporations were allowed to provide a very broad purpose, and most companies used the phrase "to engage in any lawful business" or something similar.

The state in which a company incorporates is important, since the law of that state will control most matters, including acquisitions, mergers, and powers of the board of directors. At the end of the twentieth century, many businesses chose to incorporate in Delaware because of the state's extensive history of corporate formation and its finely tuned statutes and accompanying case law.

Growth of Corporations

The U.S. Constitution gives Congress the power to regulate commerce between the states and with foreign nations, a power that Congress used to charter national banks and transcontinental railroads in the nineteenth century. Congress has used its power solely to regulate state-chartered corporations through various federal rules, including extensive antitrust laws, rather than engaging in federal incorporation.

The end of the nineteenth century saw an unprecedented expansion and dominance of the corporate form. Large companies like the Standard Oil Company and United States Steel began to exercise monopolistic powers in their respective markets. Public concern over the abuses exercised by these behemoth corporations led to antitrust legislation, laws restricting business practices considered unfair or monopolistic and aimed at preserving competition. In 1890, Congress enacted the Sherman Antitrust Act to prevent interference with interstate trade and to promote a freely competitive market.

Between 1875 and 1893, the New Jersey legislature enacted a series of statutes intended to liberalize its 1875 incorporation laws. Previous legislation designated the geographical region in which a corporation incorporated in New Jersey could hold property and do business. In 1887, the state amended the law to allow foreign corporations to own real estate in New Jersey. Five years later, the state removed all restrictions on companies incorporated in New Jersey that were doing business outside the state. While earlier laws had restricted growth in other ways, the new revised laws greatly facilitated corporate growth and mergers. The revisions granted corporations the power to merge, increase amounts of capital stock, exchange newly issued stock for property, and purchase stock in other corporations.

In 1895 the Supreme Court declared that the federal government did not have the power to prevent a state-charted corporation from acquiring control of manufacturing plants producing 98 percent of the refined sugar in the nation (United States v. E. C. Knight Company). Combined with the liberal incorporation laws of New Jersey, corporate combinations that would have otherwise been considered restraints on trade were declared legal. A relatively few large corporations now controlled American industry, and with the simultaneous relative decline of agriculture, the American economy shifted from one organized primarily around small businesses to an industrial nation.

Antitrust Measures

In 1903 Congress reacted to the movement toward mergers and oligopolies by creating the Antitrust Division of the Department of Justice. The government also established the Bureau of Corporations, with the mission of investigating and publicizing the control of industries by corporations.

Largely based on the work of the Bureau of Corporations, the Supreme Court ordered both the Standard Oil Company and American Tobacco Company to be dissolved in 1911. Woodrow Wilson became governor of New Jersey that same year, and began mounting an effort to return to a more restrictive approach to incorporations. In response, companies began leaving New Jersey and incorporating in Delaware, which had liberal statutes very much like those of New Jersey prior to the restrictive measures. When New Jersey later amended its statutes to undo the Wilson-era reforms, many of the corporations that had moved to Delaware could find no reason to move back.

In 1914 Congress passed the Clayton Antitrust Act to supplement the Sherman Act. This new federal law included specific provisions prohibiting the contract tying, exclusive dealing contracts, mergers, interlocking directorates, and price discrimination that tended to lessen competition or create a monopoly. But in 1920, in the United States Steel case, the Supreme Court sanctioned a corporate structure in which one company controlled about half of the steel industry. Thirty years later, the federal government again strengthened the law on corporate mergers and acquisitions with the creation of the Celler-Kefauver Act.

The federal government continued strengthening corporate regulations with the creation of the Securities Exchange Act, regulating the use of manipulative or deceptive methods in the purchase or sale of securities (the stocks, bonds, notes, convertible debentures, warrants, or other documents that represent a share in a corporation). The Act's original intent was to prevent company insiders from making false statements about a company's health, so that they could buy shares of stock at lower prices. It was not until later in the century that the practice of receiving inside information to buy and sell stocks for the largest gain became common.

Despite the original requirement for corporations to serve the public interest, the public's confidence in corporations began to wane in the 1960s. Labor unions and collective bargaining grew in response to public wariness around corporations. In the 1960s and 1970s, the power of corporations over the lives of consumers also elicited the growth of public interest law firms, class-action suits, and organized political and educational activities by groups of consumers and environmentalists.

The Rise of Conglomerates

Eventually, another form of corporation would emerge. Conglomerates are corporations that consist of a number of different companies operating in diversified fields, often only indirectly (or not at all) related to other corporate divisions. Conglomerates became increasingly popular during the late 1950s and early 1960s because such entities could make acquisitions and grow, yet maintain immunity from the antitrust prosecution that companies faced when making acquisitions in the same line of business. Thus businesses that were constrained within their own industry were able to freely expand into different markets.

Some of the traditionally powerful American corporations began to lose their influence in the late 1960s. The government continued strengthening its antitrust efforts, launching attacks on various conglomerates that misstated earnings. The federal government turned its attacks on IBM in 1969 and AT&T in 1974. In addition, the increasing ease of travel for business contributed to a global economy with increased market competition. As industry internationalized, American business transformed. Competition for American dollars moved from a national to a multinational stage. In fact, almost all of the largest American corporations at the beginning of the twenty-first century operated in world markets directly or through subsidiary corporations.

Modern Corporations

By the 1970s, a handful of communications media, education, research and development, computing machines, and financial and real estate companies accounted for as much as 40 percent of the country's gross national product. Microsoft, a developer of personal computer software systems and applications, was formed in 1975. The corporation moved to the front of the software market in the 1980s when its operating system became the standard for personal computers across the country. By 1993, its newest operating system release was selling more than one million copies per month. Three years later, its net income topped $2.1 billion, and it could be argued that Microsoft is the corporation that had the largest impact on American history in the twentieth century. However, the company faced charges of unfair competition and a Department of Justice investigation in 1994. In 1996, the Department of Justice reopened its investigation and, following a 30-month trial, found the corporation guilty of antitrust violations and ordered its breakup. An appeals court overturned the breakup order, but found the company guilty of trying to maintain a monopoly.

Enron Corporation, formed from the merger of natural gas pipeline companies Houston Natural Gas and InterNorth, was exposed for inflating profits in 2001. A Wall Street Journal report disclosed that Enron took a $1.2 billion charge against shareholder equity. Shortly thereafter, Enron announced that it had overstated earnings by almost $600 million, dating back four years. The Department of Justice opened a criminal investigation and found that the company actually inflated profits by $1 billion. The government also indicted Enron's accounting firm, Arthur Andersen LLP, for obstructing justice, based on evidence that the company in appropriately shredded documents related to the Enron bankruptcy.

Not long after Enron's questionable accounting practices were revealed, WorldCom, Incorporated, disclosed that it had hidden $1.2 billion in losses by failing to report $3.85 billion in expenses. The Securities and Exchange Commission (SEC) charged the long-distance telephone and data services company with fraud. The company's cofounder and chief executive officer resigned amid an SEC investigation that included questions about $366 million in personal loans from the company. Shares of WorldCom, which had flown to $64 in 1999, dropped to $.09 by July of 2002. Under the weight of both $30 billion in debt and the federal investigations, the company filed for bankruptcy, becoming the nation's largest company to ever declare insolvency.

In July 2002, as the American public voiced concern around corporations and their apparent disdain for the public interest, the U.S. stock market tumbled and the government again pledged to investigate corporate activities. The SEC began investigations of Qwest Communications International, Inc., Global Crossing Ltd., and other corporations. As more scandals of spurious accounting practices emerged across the country, some experts marveled at the irony that the increased competition resulting from antitrust legislation may have encouraged certain companies to cross the line of legality in order to remain viable.

Bibliography

Beatty, Jack, ed. Colossus: How the Corporation Changed America. New York: Broadway, 2001.

Kaysen, Carl. The American Corporation Today. New York: Oxford University Press, 1996.

Sobel, Robert. The Age of Giant Corporations: A Microeconomic History of American Business, 1914–1992. Westport, Conn.: Praeger, 1993.

Soderquist, Larry D., et al. Corporations and Other Business Organizations: Cases, Materials, Problems. 4th ed. Charlottesville, Va.: Michie, 1997.

—James T. Scott

Artificial entities that are created by state statute, and that are treated much like individuals under the law, having legally enforceable rights, the ability to acquire debt and pay out profits, the ability to hold and transfer property, the ability to enter into contracts, the requirement to pay taxes, and the ability to sue and be sued.

The rights and responsibilities of a corporation are independent and distinct from the people who own or invest in the corporation. A corporation simply provides a way for individuals to run a business and share in profits and losses.

History

The concept of a corporate personality can trace its roots to Roman law, and found its way to the American colonies through the British. After gaining independence, the states, not the federal government, assumed authority over corporations.

Although corporations initially served only limited purposes, the industrial revolution spurred their development. The corporation became the ideal way to run a large enterprise, combining centralized control and direction with moderate investments by a potentially unlimited number of people.

The corporation today remains the most common form of business organization because theoretically, a corporation can exist forever and because a corporation, not its owners and investors, is liable for its contracts. But these benefits do not come free. A corporation must follow many formalities, is subject to publicity, and is governed by state and federal regulations.

Types of Corporations

Corporations can be private, nonprofit, municipal, or quasi-public. Private corporations are in business to make money, whereas nonprofit corporations generally are designed to benefit the general public. Municipal corporations are typically cities and towns that help the state function at the local level. Quasi-public corporations would be considered private, but their business serves the public's needs, such as by offering utilities or telephone service.

There are two types of private corporations. One is the public corporation, which has a large number of investors, called shareholders. Corporations that trade their shares, or investment stakes, on securities exchanges or that regularly publish share prices are typical publicly held corporations.

The other type of private corporation is the closely held corporation. Closely held corporations have relatively few shareholders (usually 15 to 35 or fewer), often all in a single family; no outside market exists for sale of the shares; all or most of the shareholders help run the business; and the sale or transfer of shares is restricted. The vast majority of corporations are closely held.

Getting a Corporation Started

Many corporations get their start through the efforts of a person called a promoter, who goes about developing and organizing a business venture. A promoter's efforts typically involve arranging the needed capital, or financing, using loans, money from investors, or the promoter's own money; assembling the people and assets (such as land, buildings, and leases) necessary to run the corporation; and fulfilling the legal requirements for forming the corporation.

A corporation cannot be automatically liable for obligations a promoter incurred on its behalf. Technically, a corporation does not exist during a promoter's preincorporation activities. A promoter therefore cannot serve as a legal agent, who could bind a corporation to a contract. After formation, a corporation must somehow assent before it can be bound by an obligation a promoter made on its behalf. Usually, if a corporation gets the benefits of a promoter's contract, it will be treated as though it assented to and accepted the contract.

The first question faced by incorporators (those forming a corporation) is where to incorporate. The answer often depends on the type of corporation. Theoretically, both closely held and large public corporations may incorporate in any state. Small businesses operating in a single state usually incorporate in that state. Most large corporations select Delaware as their state of incorporation because of its sophistication in dealing with corporation law.

Incorporators then must follow the mechanics set forth in the state's statutes. Corporation statutes vary from state to state, but most require basically the same essentials in forming a corporation. Every statute requires incorporators to file a document, usually called the articles of incorporation, and pay a filing fee to the secretary of state's office, which reviews the filing. If the filing receives approval, the corporation is considered to have started existing on the date of the first filing.

The articles of incorporation typically must contain (1) the name of the corporation, which often must include Company, Corporation, or the like and may not resemble too closely the names of other corporations in the state; (2) the length of time the corporation will exist, which can be perpetual or renewable; (3) the corporation's purpose, usually described as "any lawful business purpose"; (4) the number and types of shares the corporation may issue and the rights and preferences of those shares; (5) the address of the corporation's registered office, which need not be the corporation's business office, and the registered agent at that office who can accept legal service of process; (6) the number of directors and the names and addresses of the first directors; and (7) each incorporator's name and address.

A corporation's bylaws usually contain the rules for actually running the corporation. Bylaws normally are not filed with the secretary of state and are easier to amend than the articles of incorporation. The bylaws should be complete enough that corporate officers can rely on them to manage the corporation's affairs. The bylaws regulate the conduct of directors, officers, and shareholders and set forth rules governing internal affairs. Bylaws can include definitions of management's duties, and times, locations, and voting procedures for meetings affecting a corporation.

People Behind a Corporation: Rights and Responsibilities

The primary players in a corporation are the shareholders, directors, and officers. Shareholders are the investors in a corporation. They elect, and sometimes remove, the directors and occasionally must vote on specific corporate transactions or operations. The board of directors is the top governing body. Directors establish corporate policy and hire officers, to whom they usually delegate their obligations to administer and manage the corporation's affairs. Officers run the day-to-day business affairs and carry out the policies the directors establish.

Shareholders

Shareholders are people who have an investment stake in a corporation, in the form of a share of stock. Their financial interest in the corporation is determined by the percentage of the total outstanding shares they own. Along with their financial stake, shareholders generally receive a number of rights, all designed to protect their investment.

Foremost among these rights is the power to vote. Shareholders vote to elect and remove directors, to change or add to the bylaws, to ratify (approve after the fact) directors' actions where the bylaws require shareholder approval, and to accept or reject changes not part of the regular course of business, such as mergers or dissolution. This power to vote, though limited, does give the shareholders some role in running a corporation.

Shareholders typically exercise their voting rights at annual or special meetings. Most statutes provide for an annual meeting, with requirements for some advance notice, and any shareholder can get a court order to hold an annual meeting when one has not been held within a specified period of time. Although the main purpose of the annual meeting is to elect directors, the meeting may deal with any relevant matter, even one not specifically mentioned in the advance notice. Almost all states allow shareholders to conduct business by unanimous written consent, without a meeting.

Shareholders elect directors each year at the annual meeting. Most statutes provide that directors be elected by a majority of the voting shares present at the meeting. The same number of shares needed to elect a director normally is required to remove a director, usually without proof of cause, such as fraud or abuse of authority.

A special meeting is any meeting other than an annual meeting. The bylaws govern who may call a special meeting; typically, the directors, certain officers, or the holders of a specified percentage of outstanding shares may do so. The only subjects that a special meeting may address are those specifically listed in an advance notice.

Statutes require that a quorum exist at any corporation meeting. A quorum exists when a specified number of a corporation's outstanding shares are represented. Statutes determine what level of representation constitutes a quorum; most require one-third. Once a quorum exists, most statutes require an affirmative vote of the majority of the shares present before a vote can bind a corporation. Generally, once a quorum is present, it continues, and the withdrawal of a faction of voters does not prevent the others from acting.

A corporation determines who may vote based on its records. Corporations issue share certificates in the name of a person, and that person becomes the record owner (owner according to company records) and is treated as the sole owner of the shares. The company records of these transactions are called stock transfer books or share registers. A shareholder who does not receive a new certificate is called the beneficial owner and cannot vote, but the beneficial owner is the real owner and can compel the record owner to act as the beneficial owner desires.

Those who hold shares by a specified date before a meeting, called the record date, may vote at the meeting. Before each meeting, a corporation must prepare a list of shareholders eligible to vote, and each shareholder has an unqualified right to inspect this voting list.

Shareholders typically have two ways of voting: straight or cumulative. Under straight voting, a shareholder may vote her or his shares once for each position on the board. For example, if a shareholder owns 50 shares and there are three director positions, the shareholder can only cast 50 votes for each position. Under cumulative voting, the same shareholder has the option of casting all 150 votes for a single candidate. Cumulative voting increases the participation of minority shareholders by boosting the power of their votes.

Shareholders also may vote as a group or block. A shareholder voting agreement is a contract among a group of shareholders to vote in a specified manner on certain issues; this is also called a pooling agreement. Such an agreement is designed to maintain control or maximize voting power. Another arrangement is a voting trust. This has the same objectives as a pooling agreement, but in a voting trust, shareholders assign their voting rights to a trustee who votes on behalf of all the shares in the trust.

Shareholders need not attend meetings to vote; they may authorize a person, called a proxy, to vote their shares. Proxy appointment often is solicited by parties interested in gaining control of the board of directors or in passing a particular proposal; their request is called a proxy solicitation. Proxy appointment must be in writing, usually may last no longer than a year, and can be revoked.

Federal law generates most proxy regulation, and the Securities and Exchange Commission (SEC) has comprehensive and detailed regulations. These rules define the form of proxy solicitation documents and require the distribution of substantial information about director candidates and other issues up for shareholder vote. Not all corporations are subject to federal proxy law; generally, the law covers only large corporations with many shareholders and with shares traded on a national securities exchange. These regulations aim to protect investors from promiscuous proxy solicitation by irresponsible outsiders seeking to gain control of a corporation and from unscrupulous officers seeking to retain control of management by hiding or distorting facts.

In addition to voting rights, shareholders also have a right to inspect a corporation's books and records. A corporation almost always views the invocation of this right as hostile. Shareholders may only inspect records if they do so for a "proper purpose"; this is a purpose reasonably relevant to the shareholder's financial interest, such as determining the worth of his or her holdings. Shareholders can be required to own a specified amount of shares or to have held the shares for a specified period of time before inspection is allowed. Shareholders generally may review all relevant records needed to gather information in which they have a legitimate interest. Shareholders also may examine a corporation's record of shareholders, including names and addresses and classes of shares.

Directors

Statutes contemplate that a corporation's business and affairs will be managed by the board of directors or under the board's authority or direction. Directors often delegate to corporate officers their authority to formulate policy and manage the business. In closely held corporations, directors normally involve themselves more in management than do their counterparts in large corporations. Statutes empower directors to decide whether to declare dividends; to formulate proposed important corporate changes, such as mergers or amendments to the articles of incorporation; and to submit proposed changes to shareholders. Many boards appoint committees to handle technical matters, such as litigation, but the board itself must deal with important matters. Directors customarily are paid a salary and often receive incentive plans that can supplement that salary.

A corporation's articles or bylaws typically control the number of directors, the terms of the directors' service, and the directors' ability to change their number and terms. The shareholders' power of removal functions as a check on directors who may wish to act contrary to the majority shareholders' wishes. The directors' own fiduciary duties, or obligations to act for the benefit of the corporation, also serve as a check on directors.

The bylaws usually regulate the frequency of regular board meetings. Directors also may hold special board meetings, which are any meetings other than regular board meetings. Special meetings require some advance notice, but the agenda of special directors' meetings is not limited to what is set forth in the notice, as it is with shareholders' special meetings. In most states, directors may hold board meetings by phone and may act by unanimous written consent without a meeting.

A quorum for board meetings usually exists if a majority of the directors in office immediately before the meeting are present. The quorum number may be increased or decreased by amending the bylaws, though it may not be decreased below any statutory minimum. A quorum must be present for directors to act, except when the board is filling a vacancy. Most statutes allow either the board itself or shareholders to fill vacancies.

Directors' fiduciary duties fall under three broad categories: the duty of care, the duty of loyalty, and duties imposed by statute. Generally, a fiduciary duty is the duty to act for the benefit of another — here, the corporation— while subordinating personal interests. A fiduciary occupies a position of trust for another and owes the other a high degree of fidelity and loyalty.

A director owes the corporation the duty to manage the corporation's business with due care. Statutes typically define using due care as acting in good faith, using the care an ordinarily prudent person would use in a similar position and situation, and acting in a manner the director reasonably thinks is in the corporation's best interests. Courts do not often second-guess directors, but they do usually find personal liability for corporate losses where there is self-dealing or negligence.

Self-dealing transactions raise questions about directors' duty of loyalty. A self-dealing transaction occurs when a director is on both sides of the same transaction, representing both the corporation and another person or entity involved in the transaction. Self-dealing may endanger a corporation because the corporation may be treated unfairly. If a transaction is questioned, the director bears the burden of proving it was in fact satisfactory.

Self-dealing usually occurs in one of four types of situations: transactions between a director and the corporation; transactions between corporations where the same director serves on both corporations' boards; by a director who takes advantage of an opportunity for business that arguably may belong to the corporation; and by a director who competes with the corporation.

The taking of a corporate opportunity poses the most significant challenge to a director's duty of loyalty. A director cannot exploit the position of director by taking for herself or himself a business opportunity that rightly belongs to the corporation. Most courts facing this question compare how closely related the opportunity is to the corporation's current or potential business. A part of this analysis involves assessing the fairness of taking the opportunity. Simply taking a corporation's opportunity does not automatically violate the duty of loyalty. A corporation may relinquish the opportunity, or the corporation may be incapable of taking the opportunity for itself.

Directors charged with violating their duty of care usually are protected by what courts call the business judgment rule. Basically, the rule states that even if the directors' decisions turn out badly for the corporation, the directors will not be personally liable for losses if those decisions were based on reasonable information and if the directors acted rationally. Unless the directors commit fraud, a breach of good faith, or an illegal act, courts presume their judgment was formed to promote the best interests of the corporation. In other words, courts focus on the process of reaching a decision, not on the decision itself, and require directors to make informed decisions, not passive decisions.

State statutes often impose additional duties and liabilities on directors as fiduciaries to a corporation. These laws may govern conduct such as paying dividends when a statute or the articles prohibit doing so; buying shares when a statute or the articles prohibit doing so; giving assets to shareholders during liquidation without resolving a corporation's debts, liabilities, or obligations; and making a prohibited loan to another director, an officer, or a shareholder.

If a court finds a director has violated a duty, the director still may not face personal liability. Some statutes require or permit corporations to indemnify a director who violated a duty but acted in good faith, received no improper personal benefit, and reasonably thought the action was lawful and in the corporation's best interests. Indemnification means that the corporation reimburses the director for expenses incurred defending himself or herself and for amounts he or she paid after losing or settling a claim.

Officers

The duties and powers of corporate officers can be found in statutes, articles of incorporation, bylaws, or corporate resolutions. Some statutes require a corporation to have specific officers; others merely require that the bylaws contain a description of the officers. Officers usually serve at the will of whoever appointed them, and they can generally be fired with or without cause, although some officers sign employment contracts.

Typically, corporations have as officers a president, one or more vice presidents, a secretary, and a treasurer. The president is the primary officer and supervises the corporation's business affairs. This officer sometimes is referred to as the chief executive officer, but the ultimate authority lies with the directors. The vice president fills in for the president when she or he cannot or will not act. The secretary keeps minutes of meetings, oversees notices, and manages the corporation's records. The treasurer manages and is responsible for the corporation's finances.

Officers act as a corporation's agents and can bind the corporation to contracts and agreements. Many parties dealing with corporations require that the board pass a resolution approving any contract negotiated by an officer, as a sure way to bind the corporation to the contract. In the absence of a specific resolution, the corporation still may be bound if it ratified the contract by accepting its benefits or if the officer appeared to have authority to bind the corporation. Courts treat corporations as having knowledge of information if a corporate officer or employee has that knowledge.

Like directors, officers owe fiduciary duties to the corporation: good faith, diligence, and a high degree of honesty. But most litigation about fiduciary duties involves directors, not officers.

An officer does not face personal liability for a transaction if the officer merely acts as the corporation's agent. Nevertheless, the officer may be personally liable for a transaction where the officer intends to be bound personally or creates the impression he or she will be; where the officer exceeds his or her authority; and where a statute imposes liability on the officer, such as for failure to pay taxes.

Finances

Shares

A corporation divides its ownership units into shares, and can issue more than one type or class of shares. The articles of incorporation must state the type or types and the number of shares that can be issued. A corporation may offer additional shares once it has begun operating, sometimes subject to current shareholders' preemptive rights to buy new shares in proportion to their current ownership.

Directors usually determine the price of shares. Some states require corporations to assign a nominal or minimum value to shares, called a par value, although many states are eliminating this practice. Many states allow some types of noncash property to be exchanged for shares. Corporations also raise money through debt financing — also called debt securities — which gives the creditor an interest in the corporation that ultimately must be paid back, much like a loan.

If a corporation issues only one type of share, its shares are called common stock or common shares. Holders of common stock typically have the power to vote and a right to their share of the corporation's net assets. Statutes allow corporations to create different classes of common stock, with varying voting power and dividend rights.

A corporation also may issue preferred shares. These are typically nonvoting shares, and their holders receive a preference over holders of common shares for payment of dividends or liquidations. Some preferred dividends may be carried over into another year, either in whole or in part.

Dividends

A dividend is a payment to shareholders, in proportion to their holdings, of current or past earnings or profits, usually on a regular and periodic basis. Directors determine whether to issue dividends. A dividend can take the form of cash, property, or additional shares. Shareholders have the right to force payment of a dividend, but they usually succeed only if the directors abused their discretion.

Restrictions on the distribution of dividends can be found in the articles of incorporation and in statutes, which seek to ensure that the dividends come out of current and past earnings. Directors who vote for illegal dividends can be held personally liable to the corporation. In addition, a corporation's creditors often will contractually restrict the corporation's power to make distributions.

Changes and Challenges Faced by Corporations

Amendments

The most straightforward and common changes faced by corporations are amendments to their bylaws and articles. The directors or incorporators initially adopt the bylaws. After that, the shareholders or directors, or both, hold the power to repeal or amend the bylaws, usually at shareholders' meetings and subject to a corporation's voting regulations. Those with this power can adopt or change quorum requirements; prescribe procedures for the removal or replacement of directors; or fix the qualifications, terms, and numbers of directors. Most modern statutes limit the authority to amend articles only by requiring that an amendment would have been legal to include in the original articles. Some statutes shield minority shareholders from harmful majority-approved amendments.

Mergers and Acquisitions

A merger or acquisition generally is a transaction or device that allows one corporation to merge into or take over another corporation. Mergers and acquisitions are complicated processes that require the involvement and approval of both the directors and the shareholders.

In a merger or consolidation, two corporations become one by either maintaining one of the original corporations or creating a new corporation consisting of the prior corporations. Where statutes authorize these combinations, these changes are called statutory mergers. The statutes allow the surviving or new corporation to automatically assume ownership of the assets and liabilities of the disappearing corporation or corporations.

Statutes protect shareholder interests during mergers, and state courts assess these combinations using the fiduciary principles applied in self-dealing transactions. Most statutes require a majority of the shareholders to approve a merger; some require two-thirds. Statutes also allow shareholders to dissent from such transactions, have a court appraise the value of their stake, and force payment at a judicially determined price.

Mergers can involve sophisticated transactions designed to simply combine corporations or to create a new corporation or to eliminate minority shareholder interests. In some mergers, an acquiring corporation creates a subsidiary as the form for the merged or acquired entity. A subsidiary is a corporation that is majority owned or wholly owned by another corporation. Creating a subsidiary allows an acquiring corporation to avoid responsibility for an acquired corporation's liabilities, while providing shareholders in the acquired corporation an interest in the acquiring corporation.

Mergers also can involve parent corporations and their subsidiaries. A similar though distinct transaction is the sale, lease, or exchange of all or practically all of a corporation's property and assets. The purchaser in such a transaction typically continues operating the business, though its scope may be narrowed or broadened. In most states, shareholders have a statutory right of dissent and appraisal in these transactions, unless the sale is part of ordinary business dealings, such as issuing a mortgage or deed of trust covering all of a corporation's assets.

Not all business combinations are consensual. Often an aggressor corporation will use takeover techniques to acquire a target corporation. Aggressor corporations primarily use the cash tender offer in a takeover: the aggressor attempts to get the target corporation's shareholders to sell, or tender, their shares at a price the aggressor will pay in cash. The aggressor sets the purchase price above the current market price, usually 25 to 50 percent higher, to make the offer attractive. This practice often requires the aggressor to assume significant debts in the takeover, and these debts often are paid for by selling off parts of the target corporation's business.

Restraints and protections do exist for these situations. In takeovers of registered or large, publicly held corporations, federal law requires the disclosure of certain information, such as the source of the money in the tender offer. In smaller corporations, a controlling shareholder, who holds a majority of a corporation's shares, cannot transfer control to someone outside the corporation without a reasonable investigation of the potential buyer. A controlling shareholder also cannot transfer control where there is a suspicion the buyer will use the corporation's assets to pay the purchase price or will otherwise wrongfully take the corporation's assets.

Corporations can employ defensive tactics to fend off a takeover. They can find a more compatible buyer (a "white knight"); issue additional shares to make the takeover less attractive (a "lockup"); create new classes of stock whose rights increase if any person obtains more than a prescribed percentage (a "poison pill"); or boost share prices to make the takeover price less appealing.

Dissolution

A corporation can terminate its legal existence by engaging in the dissolution process. Most statutes allow corporations to dissolve before they begin to operate as well as after they get started. The normal process requires the directors to adopt a resolution for dissolution and the shareholders to approve it, by either a simple majority or, in some states, a two-thirds majority. After approval, the corporation engages in a "winding-up" period, during which it fulfills its obligations for taxes and debts, before making final, liquidation distributions to shareholders.

Derivative Suits

Shareholders can bring suit on behalf of a corporation to enforce a right or remedy a wrong done to the corporation. Shareholders "derive" their right to bring suit from a corporation's right. A common claim in a derivative suit would allege misappropriation of corporate assets or other breaches of duty by the directors or officers. Shareholders most often bring derivative suits in federal courts.

Shareholders must maneuver through several procedural hoops before actually filing suit. Many statutes require them to put up security, often in the form of a bond, for the corporation's expenses and attorneys' fees from the suit, to be paid if the suit fails; this requirement often kills a suit before it begins. The shareholders must have held stock at the time of the contested action and owned it continuously since. The shareholders must first demand that the directors enforce the right or remedy the wrong; if they fail to make a demand, they must offer sufficient proof of the futility of such a demand. Normally, a committee formed by the directors handles — and dismisses — the demand, and informed decisions are protected by the business judgment rule.

Proxy Contests

A proxy contest is a struggle for control of a public corporation. In a typical proxy contest, a nonmanagement group vies with management to gain enough proxies to elect a majority of the board and gain control of the corporation. A proxy contest may be a part of a takeover attempt.

Management holds most of the cards in such disputes: it has the current list of shareholders; shareholders normally are biased in its favor; and the nonmanagement group must finance its part of the proxy contest, but if management acts in good faith, it can use corporate money for its solicitation of proxy votes. In proxy contests in large, publicly held corporations, federal regulations prohibit, among other things, false or misleading statements in solicitations for proxy votes.

Insider Trading

Federal, and often state, laws prohibit a corporate insider from using nonpublic information to buy or sell stock. Most cases involving violations of these laws are brought before federal courts because the federal law governing this conduct is extensive. The federal law, which is essentially an antifraud statute, states that anyone who knowingly or recklessly misrepresents, omits, or fails to correct a material or important fact that causes reliance in a sale or purchase, is liable to the buyer or seller. Those with inside information must either disclose the information or abstain from buying or selling.

Permutations

Corporations do not represent the only, or necessarily the best, type of business. Several other forms of business offer varying degrees of organizational, financial, and tax benefits and drawbacks. The selection of a particular form depends on the investors' or owners' objectives and preferences, and on the type of business to be conducted.

A partnership is the simplest business organization involving more than one person. It is an association of two or more people to carry on business as co-owners, with shared rights to manage and gain profits and with shared personal liability for business debts. A proprietorship is more or less a one-person partnership. It is a business owned by one person, who alone manages its operation and takes its profits and is personally liable for all its debts. A limited partnership is a partnership with two or more general partners, who manage the business and have personal and unlimited liability for its debts, and one or more limited partners, who have almost no management powers and whose liability is limited to the amount of their investment. In a limited liability company, the limited liability of a limited partnership is combined with the tax treatment of a partnership, and all partners have limited liability and the authority to manage; this is a relatively new business form.

A corporation thus provides limited liability for shareholders, unlike a partnership, a proprietorship, or a limited partnership, all of which expose owners to unlimited liability. A corporation is taxed like a separate entity on earnings, out of which the corporation pays dividends, which are then taxed to the shareholders; this is considered double taxation. Partnerships and limited partnerships are not taxed as separate entities, and income or losses are allocated to the partners, who are directly taxed; this "flow-through" taxation allocates income or losses only once. Corporations centralize management in the directors and officers, whereas partnerships divide management among all partners or general partners. Corporations can continue indefinitely despite the death or withdrawal of a shareholder; partnerships and limited partnerships end with the death or withdrawal of a partner. Shareholders in a corporation generally can sell or transfer their stock without limitation; holders of interest in a partnership or limited partnership can convey their interest only if the other partners approve. Corporations must abide by significant formalities and cope with a great volume of paperwork; partnerships and limited partnerships face few formalities and few limitations in operating their business.

See: Golden Parachute; Greenmail; Instrumentality Rule; Transnational Corporation.

A business organization owned by a group of stockholders, each of whom enjoys limited liability (that is, each can be held responsible for losses only up to the limit of his or her investment). A corporation has the ability to raise capital by selling stock to the public.

A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. 

The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts.

Corporations are often called "C Corporations".

Investopedia Says:
A corporation is created (incorporated) by a group of shareholders who have ownership of the corporation, represented by their holding of common stock. Shareholders elect a board of directors (generally receiving one vote per share) who appoint and oversee management of the corporation. Although a corporation does not necessarily have to be for profit, the vast majority of corporations are setup with the goal of providing a return for its shareholders. When you purchase stock you are becoming part owner in a corporation.

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n.

An ingenious device for obtaining individual profit without individual responsibility.

A business entity such as a company incorporated under legislation, usually a Companies Act, which can make the shareholders legally responsible only for the profits and debts of the company. That is the shareholders are not personally responsible. It has been held for generations that members of professions could not practice as corporations because they would lose their personal responsibility to their clients. It is becoming more common for this rule to be discarded.

• Corporations and Business Practices - corporation: business organization existing and treated as legal entity independent of its individual owners
• Income Tax - corporation: business entity that is organized under incorporation laws of one state and usu. pays taxes on net profits

This article is about business corporations. For other uses, see Corporation (disambiguation).

"Corporate" redirects here. For the Bollywood film, see Corporate (film).

A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members.^[1] There are many different forms of corporations. Many corporations are established for business purposes but public bodies, charities and clubs are often corporations as well. Corporations take many forms including: statutory corporations, corporations sole, joint-stock companies and cooperatives. An important (but not universal) contemporary feature of a corporation is limited liability. If a corporation fails, shareholders may lose their investments, and employees may lose their jobs, but neither will be liable for debts to the corporation's creditors.

Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons ("people"). Corporations can exercise human rights against real individuals and the state,^[2] and they can themselves be responsible for human rights violations.^[3] Corporations are conceptually immortal but they can "die" when they are "dissolved" either by statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate 'death', when creditors force the liquidation and dissolution of the corporation under court order,^[4] but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such as fraud and manslaughter. However corporations are not living entities in the way that humans are.^[5]

Early corporations were established by charter (i.e. by an ad hoc act granted by a monarch or passed by a parliament or legislature). Most jurisdictions now allow the creation of new corporations through registration. In addition to legal personality, registered companies tend to have limited liability, be owned by shareholders who can transfer their shares to others, and controlled by a board of directors who the shareholders appoint.

Contents 1 History 1.1 Mercantilism 1.2 Modern corporations 2 Corporate law 2.1 Ownership and control 2.2 Formation 2.3 Naming 2.4 Financial disclosure 2.5 Unresolved issues 3 Types 3.1 For-profit and non-profit 3.2 Closely held corporations and publicly traded corporations 3.3 Benefit corporation 3.4 Mutual benefit corporations 4 Corporations globally 4.1 Australia 4.2 Brazil 4.3 Canada 4.4 German-speaking countries 4.5 Italy 4.6 Japan 4.7 Spain 4.8 United Kingdom 4.9 United States 5 Corporate taxation 6 Criticisms 7 Other business entities 8 See also 9 Notes 10 References 11 Further reading 12 External links

History

Main articles: History of corporations and List of oldest companies

1/8 share of the Stora Kopparberg mine, dated June 16, 1288.

The word "corporation" derives from corpus, the Latin word for body, or a "body of people." Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India.^[6] In medieval Europe, churches became incorporated, as did local governments, such as the Pope and the City 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, 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 or the Hudson's Bay Company, and these corporations came to play a large part in the history of corporate colonialism.

During the time of colonial expansion in the 17th century, the true progenitors of the modern corporation emerged as the "chartered company". Acting under a charter sanctioned by the Dutch government, the Dutch East India Company (VOC) defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company's royal charter.^[7] In the late 18th century, 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 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)

Mercantilism

See also: Mercantilism and South Sea Bubble

A bond issued by the Dutch East India Company, dating from 1623, for the amount of 2,400 florins

Labeled by both contemporaries and historians as "the grandest society of merchants in the universe", the British 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.^[8] On 31 December 1600, the English monarchy granted the company a 15-year monopoly on trade to and from the East Indies and Africa. By 1611, shareholders in the East India Company were earning an almost 150% return on their investment. Subsequent stock offerings demonstrated just how lucrative the Company had become. Its first stock offering in 1613-1616 raised £418,000, and its first offering in 1617-1622 raised £1.6 million.^[9]

In the United States, government chartering began to fall out of vogue in the mid-19th century. 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.^[10] 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 in the United States are set up under Delaware law.

By the beginning of the 19th century, government policy on both sides of the Atlantic began to change, reflecting the growing popularity of the proposition that corporations were riding the economic wave of the future. In 1819, the U. S. Supreme Court granted corporations a plethora of rights they had not previously recognized or enjoyed.^[11] Corporate charters were deemed "inviolable", and not subject to arbitrary amendment or abolition by state governments.^[12] The Corporation as a whole was labeled an "artificial person, " possessing both individuality and immortality.^[13]

At around the same time, British legislation was similarly freeing the corporation from historical restrictions. In 1844 the British Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter or an Act of Parliament.^[14] Ten years later, limited liability, the key provision of modern corporate law, passed into English law: in response to increasing pressure from newly emerging capital interests, Parliament passed the Limited Liability Act 1855, which established the principle that any corporation could enjoy limited legal liability on both contract and tort claims simply by registering as a "limited" company with the appropriate government agency.^[15]

This prompted the English periodical The Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated. "^[16] The glaring inaccuracy of the second part of this judgment was recognized 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 trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution. "^[17]

Modern corporations

By the end of the 19th century the Sherman Act, New Jersey allowing holding companies, and mergers resulted in larger corporations with dispersed shareholders. (See The Modern Corporation and Private Property ^[18] The well-known Santa Clara County v. Southern Pacific Railroad decision began to influence policymaking and the modern corporate era had begun.

The 20th century saw a proliferation of enabling law across the world, which helped to drive economic booms in many countries before and after World War I. Starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly owned services and enterprises to corporations. Deregulation (reducing the regulation of corporate activity) often accompanied privatization as part of a laissez-faire policy. Another major postwar shift was toward the 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.^[19]

Corporate law

Main article: Corporate law

Companies law
Company Business
Business entities
Sole proprietorship Partnership (General, Limited, Limited liability) Corporation Cooperative
European Union / EEA
EEIG SCE SE SPE
UK / Ireland / Commonwealth
Community interest company Limited company (by guarantee, by shares, Proprietary, Public) Unlimited company
United States
Benefit corporation C corporation LLC Series LLC LLLP S corporation Delaware corporation Delaware statutory trust Massachusetts business trust Nevada corporation
Additional entities
AB AG ANS A/S AS GmbH K.K. N.V. Oy S.A. more
Doctrines
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The existence of a corporation requires a special legal framework and body of law that specifically grants the corporation legal personality, and typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person). Corporate statutes typically empower corporations to own property, sign binding contracts, and pay taxes in a capacity separate from that of its shareholders (who are sometimes referred to as "members"). According to Lord Chancellor Haldane,

...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.

—Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705

The legal personality has two economic implications. First it grants creditors (as opposed to shareholders or employees) priority over the corporate assets upon liquidation. Second, corporate assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law.^[20]

The regulations most favorable to incorporation include:

Regulation	Description
Limited liability	Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations.[21] As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. This enables corporations to "socialize their costs" for the primary benefit of shareholders; to socialize a cost is to spread it to society in general.[22] The economic rationale for this is that it allows anonymous trading in the shares of the corporation, by eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller. Limited liability further allows corporations to raise large amounts of finance for their enterprises by combining funds from many owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This increases the attraction to potential shareholders, and thus increases both the number of willing shareholders and the amount they are likely to invest. However, some jurisdictions also permit another type of corporation, in which shareholders' liability is unlimited, for example the unlimited liability corporation in two provinces of Canada, and the unlimited company in the United Kingdom.
Perpetual lifetime	Another advantage is that the assets and structure of the corporation may continue beyond the lifetimes of its shareholders and bondholders. This allows stability and the accumulation of capital, which is thus available for investment in larger and longer-lasting projects than if the corporate assets were subject to dissolution and distribution. This was also important in medieval times, 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. (However a corporation can be dissolved by a government authority, putting an end to its existence as a legal entity. But this usually only happens if the company breaks the law, for example, fails to meet annual filing requirements, or in certain circumstances if the company requests dissolution.)

Ownership and control

A corporation is typically owned and controlled by its members. In a joint-stock company the members are known as shareholders and their share 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 who the corporation's members are. Who is a member depends on what kind of corporation is involved. In a worker cooperative the members are people who work for the cooperative. In a credit union the members are people who have accounts with the credit union.

The day-to-day activities of a corporation is 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 a board of directors is the method favored in most common 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 formers' management of the company
• A two-tired committee structure with a supervisory board and a managing board is common in civil law countries. Under this model the executive directors sit on one committed while the non-executive directors sit on the other.

Formation

Historically, corporations were created by a charter granted by government. Today, corporations are usually registered 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 a registered agent (a person or company designated to receive legal service of process). It may also be required to designate 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.

Naming

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 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" or "Ltd."). These terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not.^[23] Their use puts everybody on constructive notice that they are dealing with an entity whose liability is limited, and does not reach back to the persons who own the entity: one can only collect from whatever assets the entity still controls when one obtains a judgment against it.

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 a sole proprietorship but this is not generally the case elsewhere).

Financial disclosure

In many jurisdictions, corporations whose shareholders benefit from limited liability are required to publish annual financial statements and other data, so that creditors who do business with the corporation are able to assess the creditworthiness of the corporation and cannot enforce claims against shareholders.^[24] Shareholders therefore experience some loss of privacy in return for limited liability. This requirement generally applies in Europe, but not in Anglo-American jurisdictions, except for publicly traded corporations, where financial disclosure is required for investor protection.

Unresolved issues

The nature of the corporation continues to evolve in response to new situations as existing corporations promote new ideas and structures, the courts respond, and governments issue new regulations. A question of long standing is that of diffused responsibility. For example, if a corporation is found liable for a death, how should culpability and punishment for it be allocated among shareholders, directors, management and staff, and the corporation itself? See corporate liability, and specifically, corporate manslaughter.

The law differs among jurisdictions, and is in a state of flux. Some argue that shareholders should be ultimately responsible in such circumstances, forcing them to consider issues other than profit when investing, but a corporation may have millions of small shareholders who know nothing about its business activities. Moreover, traders — especially hedge funds — may turn over shares in corporations many times a day.^[25] The issue of corporate repeat offenders (see H. Glasbeek, "Wealth by Stealth: Corporate Crime, Corporate Law, and the Perversion of Democracy", ISBN 978-1-896357-41-6, Between the Lines Press: Toronto 2002) raises the question of the so-called "death penalty for corporations."^[26]

Types

For a list of types of corporation and other business types by country, see Types of business entity.

Depending on the jurisdiction, there are four types of corporations, of which a particular jurisdiction will allow two of them. The types of corporations which a jurisdiction will charter either are for-profit corporations and not-for-profit corporations, or it will charter stock corporations and non-stock corporations. The main difference is that a corporation that is for profit is usually a stock corporation, but can be a non-stock corporation, but a not-for-profit corporation is usually a non-stock corporation. There are certain states which do allow a non-profit corporation to issue stock, including Kansas, Delaware, and Michigan.^[27] Generally this states allow the stock for purposes of control of the non-profit corporation but allow no dividends.

Most corporations are registered with the local jurisdiction as either a stock corporation or a non-stock corporation. Stock corporations sell stock to generate capital. A stock corporation must always be a for-profit corporation. A non-stock corporation cannot have stockholders, 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.

Several states also allow a variation of the corporation for use by professionals (i.e., those individuals typically considered as professionals who require a license from the state to conduct business). In some states, such as Georgia, these corporations are known as "professional corporations". A professional corporation will always be a for-profit corporation.

For-profit and non-profit

Main article: non-profit organization

Corporate entities may be formed for either profit- or not-for-profit (also called non-profit) purposes. Many non-profit corporations are also tax-exempt (such as charities), which means the corporation's income is not taxed under federal or state law or both.

Different principles of corporate governance apply to a wide variety of business and non-profit activities. Although the laws governing these creatures of statute differ between various types of entities, many of the principles and rules that govern profit-making enterprises also apply to non-profit organizations — as the underlying structures of these two types of entity often resemble each other.

Closely held corporations and publicly traded corporations

This unreferenced section requires citations to ensure verifiability.

The institution most often referenced by the word "corporation" is a publicly traded corporation, the shares of which are traded on a public stock exchange (for example, the New York Stock Exchange or Nasdaq in the United States) where shares of stock of corporations are bought and sold 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 shares. 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 do have some advantages over publicly traded corporations. A small, closely held company can often make company-changing decisions much more rapidly than 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 on what the company is doing but the market and even what the competitors are doing. Publicly traded companies also have advantages over their closely held counterparts. Publicly traded companies often have more working capital and can delegate debt throughout all shareholders. 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 closely held 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 this blow is enough to make a small public company fail.

Often communities benefit from a closely held company more so than 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 shareholders can incur some of the damage the company may receive from a bad year or slow period in the company profits. 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 shareholders can incur this profit damage rather than passing it to the workers.

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 (for example, mergers) or events (for example, elections of directors).

A closely held corporation may be a subsidiary of another corporation (its parent company), which may itself be either a closely held or a public corporation. In some jurisdictions, the subsidiary of a listed public corporation is also defined as a public corporation (for example, Australia).

Benefit corporation

Main article: Benefit corporation

A benefit corporation, or in short-hand a B corporation, is a class of corporation required by law to create general benefit for society as well as for shareholders. Benefit Corporations must create a material positive impact on society, and consider how their decisions affect their employees, community, and the environment. Moreover, they must publicly report on their social and environmental performances using established third-party standards.^[28]

The chartering of Benefit Corporations is an attempt to reclaim the original purpose for which corporations were chartered in early America. Then, states chartered corporations to achieve a specific public purpose, such as building bridges or roads. Their legitimacy stemmed from their delegated charter, although they could still earn profits while fulfilling it.

Over time, however, corporations came to be chartered without any public purpose, while being legally bound to the singular purpose of profit-maximization for its shareholders. Advocates of Benefit Corporations assert that this singular focus has resulted in a variety of societal ills, including the thwarting of democracy, diminished social good, and negative environmental impacts.^[29]

In April 2010, Maryland became the first U.S. state to pass Benefit Corporation legislation. Hawaii, Virginia, California, Vermont, and New Jersey soon followed. Additionally, as of November 2011, Benefit Corporation legislation had been introduced or partially passed in Colorado, New York, North Carolina, Pennsylvania, and Michigan.^[30]

Benefit Corporation laws address concerns held by entrepreneurs who wish to raise growth capital but fear losing control of the social or environmental mission of their business. In addition, the laws provide companies the ability to consider factors other than the highest purchase offer at the time of sale, in spite of the ruling on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.. Chartering as a Benefit Corporation also allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than mere profit-maximization for shareholders.^[31]

Mutual benefit corporations

A mutual benefit nonprofit corporation is a corporation formed in the United States 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.^[32]

Corporations globally

Main article: Multinational corporation

Following 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 shareholders and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favor 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 shareholder 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.

Australia

Main article: Corporations Act 2001

In 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.

Brazil

In Brazil there are many different types of legal entities ("sociedades"), but the two most common ones commercially speaking are: (i) "sociedade limitada", identified by "Ltda." or "Limitada" after the company's name, equivalent to the British limited liability company, and (ii) "sociedade anônima" or "companhia", identified by "S.A." or "Companhia" in 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 "S.A." by the Law 6.404 dated December 15, 1976, as amended.

Canada

Main article: Canadian corporation

In 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; though its business has always been based in Canada, its Royal Charter was issued in England by King Charles II in 1670, and became a Canadian charter by amendment in 1970 when it moved its corporate headquarters from London to Canada. Federally recognized corporations are regulated by the Canada Business Corporations Act.

German-speaking countries

Main article: Aktiengesellschaft

Germany, Austria, Switzerland and Liechtenstein recognize two forms of company limited by shares: the Aktiengesellschaft (AG), analogous to public limited companies (or corporations in US/Can) in the English-speaking world, and the Gesellschaft mit beschränkter Haftung (GmbH), similar to the modern private limited company.

Italy

Italy recognizes three types of company limited by shares: the private limited company (società a responsabilità limitata, or S.r.l), public limited company (società per azioni, or S.p.A), and the publicly-traded partnership (società in accomandita per azioni, or S.a.p.a.). The latter is a hybrid of the limited partnership and public limited company, having two categories of shareholders, some with and some without limited liability, and is rarely used in practice.

Japan

In Japan, both the state and local public entities under the Local Autonomy Law (prefectures and municipalities) are considered to be corporations (法人, hōjin^?). Non-profit corporations may be established under the Civil Code.

The term "company" (会社, kaisha^?) is used to refer to business corporations. The predominant form is the kabushiki kaisha (株式会社), used by public corporations as well as smaller enterprises. Mochibun kaisha (持分会社), a form for smaller enterprises, are becoming increasingly common. Between 2002 and 2008, the intermediary corporation (中間法人, chūkan hōjin^?) existed to bridge the gap between for-profit companies and non-governmental and non-profit organizations.

Spain

In Spain there are two types of companies: with limited liability called "S.L", or "Sociedad Limitada" (a private limited company) and "S.A." or "Sociedad Anónima" (similar to a Public Limited Company).

United Kingdom

Main article: UK company law

In the United Kingdom, 'corporation' most commonly refers to a body corporate formed by Royal Charter or by statute, of which few now remain. The BBC is the oldest and best known corporation within the UK that is still in existence. Others, such as the British Steel Corporation, were privatized in the 1980s.

In the private sector, corporations are referred to as companies, and are regulated by the Companies Act 2006 (or the Northern Ireland equivalent). 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 private unlimited company, and companies limited by guarantee.

A special type of corporation is a corporation sole, which is an office held by an individual natural person (the incumbent), but which has a continuing legal entity separate from that person: an example is a Church of England bishopric

United States

See also: Corporate law in the United States and Delaware corporation

Several types of conventional corporations 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’. A corporation was defined in the Dartmouth College case of 1819, in which Chief Justice Marshall of the United States Supreme Court stated that " A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law". A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity the corporation can acquire, own, and dispose of property in its own name like buildings, land and equipment. It can also incur liabilities and enter into contracts like franchising and leasing. 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 Internal Revenue Code that addresses the tax exemption for many of them.

In some states, such as Colorado, a corporation may represent itself pro se in courts of law in some situations ^[33]

The federal government can only create corporate entities pursuant to relevant powers in the U.S. Constitution. For example, Congress has constitutional power to provide postal services, so it has power to operate the United States Postal Service. Although the federal government could theoretically preempt all state corporate law under the courts' current expansive interpretation of the Commerce Clause, it has chosen not to do so. As a result, much of American corporate law continues to be a matter of state law under the Tenth Amendment to the United States Constitution. Thus, virtually all corporations in the U.S. are incorporated under the laws of a particular state.

All states have some kind of "general corporation law" (California, Delaware, Kansas, Nevada and Ohio actually use that exact name) which authorizes the formation of private corporations without having to obtain a charter for each one from the state legislature (as was formerly the case in the 19th century). Many states have separate, self-contained laws authorizing the formation and operation of certain specific types of corporations that are wholly independent of the state general corporation law. For example, in California, nonprofit corporations are incorporated under the Nonprofit Corporation Law, and in Illinois, insurers are incorporated under the Illinois Insurance Code.

Corporations are created by filing the requisite documents with a particular state government. The process is called “incorporation,” referring to the abstract concept of clothing the entity with a "veil" of artificial personhood (embodying, or “corporating” it, ‘corpus’ being the Latin word for ‘body’). Only certain corporations, including banks, are chartered. Others simply file their articles of incorporation with the state government as part of a registration process.

Once incorporated, a 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 in each state 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 dramatically from state to state. Many prospective corporations choose to incorporate in a state whose laws are most favorable to its business interests. Many large corporations are incorporated in Delaware, for example, without being physically located there because that state has very favorable corporate tax and disclosure 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 persons. 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 (also known as 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 is 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. In addition to typical corporations in the United States, the federal government, in 1971 passed the Alaska Native Claims Settlement Act (ANCSA), which authorized the creation of 12 regional native corporations for Alaska Natives and over 200 village corporations that were entitled to a settlement of land and cash. In addition to the 12 regional corporations, the legislation permitted a 13th regional corporation without a land settlement for those Alaska Natives living out of the State of Alaska at the time of passage of ANCSA.

Corporate taxation

Main article: Corporate tax

In many countries 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 the Australian 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. In other systems, dividends are taxed at a lower rate than other income (for example, in the US) or shareholders are taxed directly on the corporation's profits and dividends are not taxed (for example, S corporations in the US).

Criticisms

Main article: Criticisms of corporations

As Adam Smith pointed out in the Wealth of Nations, when ownership is separated from management (i.e. the actual production process required to obtain the capital), the latter will inevitably begin to neglect the interests of the former, creating dysfunction within the company.^[34] Some maintain that recent events in corporate America may serve to reinforce Smith's warnings about the dangers of legally protected collectivist hierarchies.^[35]

Other business entities

Main article: Types of business entity

Almost every recognized type of organization carries out some economic activities (for example, 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:

• Consumers' cooperative
• Holding company
• Limited company (Ltd.)
• Limited liability company (LLC)
• Limited liability limited partnership (LLLP)
• Limited liability partnership (LLP)
• Limited partnership (LP)
• Low-profit limited liability company (L3C)
• Not-for-profit corporation
• Partnership
• Sole proprietorship
• Trust company, Trust law

See also

Law

• Corporate law
• United Kingdom company law
• United States corporate law
• German company law
• European company law
• Commercial law

Other

• Alaska Native Corporation
• Anti-corporate activism
• Blocker corporation
• Community interest company
• Company (law)
• Conglomerate (company)
• Cooperative
• Corporate crime
• Corporate governance
• Corporate haven
• Corporate scandals
• Corporate welfare
• Corporatism
• Evil corporation
• Finance capitalism
• Good standing
• Guild
• Incorporation (business)
• List of strikes
• Megacorporation
• Multinational corporation
• Organizational culture
• Preferred stock
• Professional corporation (PC or P.C.)
• Public limited company (PLC)
• Registered Agent
• Shelf Corporation
• Stock certificates
• State-owned Corporation
• Unlimited company
• Unlimited liability corporation

Notes

1. ^ Definition of a "corporation" from Reference.com
2. ^ e.g. South African Constitution Art.8, especially Art.(4)
3. ^ 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.
4. ^ See, for example, the Business Corporations Act (B.C.) [SBC 2002] CHAPTER 57, Part 10
5. ^ e.g. Corporate Manslaughter and Corporate Homicide Act 2007
6. ^ Vikramaditya S. Khanna (2005). The Economic History of the Corporate Form in Ancient India. University of Michigan.
7. ^ Om Prakash, European Commercial Enterprise in Pre-Colonial India (Cambridge University Press, Cambridge 1998).
8. ^ John Keay, The Honorable Company: A History of the English East India Company (MacMillan, New York 1991).
9. ^ Ibid. at 113.
10. ^ The Law of Business Organizations
11. ^ Trustees of Dartmouth College v. Woodward, 17 U. S. 518 (1819).
12. ^ Id. at 25.
13. ^ Id. at 45.
14. ^ Sean M. O'Connor, Be Careful What You Wish For: How Accountants and Congress Created the Problem of Auditor Independence, 45 B. C. L. Rev. 741, 749 (2004).
15. ^ Limited Liability Act, 18 & 19 Vict., ch. 133 (1855)(Eng.), cited in Paul G. Mahoney, Contract or Concession? An Essay on the History of Corporate Law, 34 Ga. L. Rev. 873, 892 (2000).
16. ^ Graeme G. Acheson & John D. Turner, The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914, School of Management and Economics, Queen's University of Belfast, available at [1] and [2].
17. ^ Economist, December 18, 1926, at 1053, as quoted in Mahoney, supra, at 875.
18. ^ For a comparison of the differences between the "Classic Corporation" (before 1860) and the "Modern Corporation" (after 1900), see Ted Nace, Gangs of America: The Rise of Corporate Power and the Disabling of Democracy 71 (Berrett-Koehler Publishers, Inc., San Francisco 2003).
19. ^ Apple
20. ^ Hansmann et al., The Anatomy of Corporate Law, pg 7.
21. ^ A leading case in common law is Salomon v. Salomon & Co. [1897] AC 22.
22. ^ Hock, Dee (2005). One from Many: VISA and the Rise of Chaordic Organization. Berrett-Koehler Publishers. p. 140. ISBN 1-57675-332-8. "... they have become a superb instrument for the capitalization of gain and the socialization of cost." 
23. ^ The U.S. state of California is an example of a jurisdiction that 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.
24. ^ Hicks, A. and Goo, S.H. (2008) Cases and Materials on Company Law Oxford University Press Chapter 4
25. ^ See, for example, the Ontario's Environmental Protection Act.
26. ^ CorpWatch : The Death Penalty for Corporations Comes of Age
27. ^ Bruce R. Hopkins; Virginia C. Gross (2 June 2009). Nonprofit Governance: Law, Practices, and Trends. John Wiley & Sons. pp. 101–. ISBN 978-0-470-35804-7. http://books.google.com/books?id=Lir1HW3Aj8AC&pg=PA101. Retrieved 9 May 2012. 
28. ^ "Maryland First State in Union to Pass Benefit Corporation Legislation". CSRWire USA. 14 April 2010. http://www.csrwire.com/press_releases/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation. 
29. ^ Raskin, Jamie. "The Rise of Benefit Corporations", The Nation, 2011 June 8. Available at http://www.thenation.com/article/161261/rise-benefit-corporations
30. ^ B Corp Legislation. Available at http://www.bcorporation.net/publicpolicy. Also see "Md. 'becoming the Delaware of benefit corporations'". Baltimore Business Journal. 5 October 2010. http://www.bizjournals.com/baltimore/stories/2010/10/04/daily18.html. , "New Jersey B Corporation Bill Passes Legislature; Heads to Governor for Signature". Care2. 13 January 2011. http://www.care2.com/causes/new-jersey-b-corporation-bill-passes-legislature-heads-to-governor-for-signature.html. , "New York State Senate and Assembly Pass Benefit Corporation Legislation". Buffalo Rising. 28 June 2011. http://www.buffalorising.com/2011/06/new-york-state-senate-and-assembly-pass-benefit-corporation-legislation.html. 
31. ^ New-Economy Movement article by Gar Alperovitz, also appeared in the June 13, 2011 edition of The Nation
32. ^ Official website of the Secretary of State, for the (United States) state of Vermont
33. ^ [3] Brachfeld, Aaron, USDA (February 2012). "Judge Boyette rules on corporate rights to self-represent" The Meadowlark Herald, Volume 3 Issue 6. Retrieved February 19, 2012.
34. ^ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations 741 (Clarendon, Oxford 1776).
35. ^ The fall of the Enron corporation stemmed largely from the company's attempt to create new energy trading markets, and its strategy of trading paper wealth in order to maintain the appearance of profitability. For a thorough analysis of Enron's missteps and ultimate destruction, see Kurt Eichenwald, Conspiracy of Fools (Broadway Books, New York 20050.

References

• A.B. DuBois, The English Business Company after the Bubble Act, , (1938)
• A Comparative Bibliography: Regulatory Competition on Corporate Law
• Bishop Hunt, The Development of the Business Corporation in England (1936)
• Blumberg, Phillip I., The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993)
• Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.
• Bruce Brown, The History of the Corporation (2003)
• C. A. Cooke, Corporation, Trust and Company: A Legal History, (1950)
• Charles Freedman, Joint-stock Enterprise in France, : From Privileged Company to Modern Corporation (1979)
• Conard, Alfred F. Corporations in Perspective. 1976.
• Dignam, A and Lowry, J (2006) Company Law, Oxford University Press ISBN 978-0-19-928936-3
• Ernst Freund, MCMaster.ca, The Legal Nature of the Corporation (1897)
• Edwin Merrick Dodd, American Business Corporations until 1860, With Special Reference to Massachusetts, (1954)
• John Micklethwait and Adrian Wooldridge. The Company: a Short History of a Revolutionary Idea. New York: Modern Library. 2003.
• Frederick Hallis, Corporate Personality: A Study in Jurisprudence (1930)
• Hessen, Robert. In Defense of the Corporation. Hoover Institute. 1979. ISBN -X
• John P. Davis, Corporations (1904)
• John William Cadman, The Corporation in New Jersey: Business and Politics, , (1949)
• Joseph S. Davis, Essays in the Earlier History of American Corporations (1917)
• Klein and Coffee. Business Organization and Finance: Legal and Economic Principles. Foundation. 2002. ISBN -X
• Radhe Shyam Rungta, The Rise of the Business Corporation in India, 1851–1900, (1970)
• Ramesh Chandra Majumdar, Corporate Life in Ancient India, (1920)
• Robert Charles Means, Underdevelopment and the Development of Law: Corporations and Corporation Law in Nineteenth-century Colombia, (1980)
• Sobel, Robert. The Age of Giant Corporations: a Microeconomic History of American Business. (1984)
• Thomas Owen, The Corporation under Russian Law, : A Study in Tsarist Economic Policy (1991)
• W. R. Scott, Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720 (1912)

Further reading

• Barnet, Richard; Ronald E. Muller (1974). Global Reach: The Power of the Multinational Corporation. New York, NY: Simon & Schuster. 
• Low, Albert, 2008. "Conflict and Creativity at Work: Human Roots of Corporate Life, Sussex Academic Press. ISBN 978-1-84519-272-3

External links

Wikiquote has a collection of quotations related to: Corporations

• US Corporate Law at Wikibooks
• US Corporate Law
• an Audio from a talk about the history of corporations and the English Law by Barrister Daniel Bennett

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Common misspelling(s) of corporation

• coorperation

Dansk (Danish)
n. - juridisk person, kommunalbestyrelse, magistrat, selskab, borgmestermave

Nederlands (Dutch)
rechtspersoon, corporatie, gemeentebestuur, (bier) buikje, Naamloze Vennootschap

Français (French)
n. - (Comm) grande société, (GB) conseil municipal, (GB) bedaine (hum)

Deutsch (German)
n. - Körperschaft, Aktiengesellschaft, Handelsgesellschaft, Gemeinde

Ελληνική (Greek)
n. - νομικό πρόσωπο, ανώνυμη ή μετοχική εταιρεία, σωματείο, συντεχνία, δημοτική αρχή

Italiano (Italian)
istituzione, società per azioni, personalità giuridica, consiglio

Português (Portuguese)
n. - corporação (f), companhia (f) comercial, associação (f)

Русский (Russian)
корпорация, акционерное общество, муниципалитет

Español (Spanish)
n. - corporación, sociedad anónima, ayuntamiento

Svenska (Swedish)
n. - korporation, samfund, bolag, juridisk person, styrelse, kalaskula (vard.), skrå (åld.)

中文（简体）(Chinese (Simplified))
法人, 股份公司, 社团法人, 市政府

中文（繁體）(Chinese (Traditional))
n. - 法人, 股份公司, 社團法人, 市政府

한국어 (Korean)
n. - 법인 , 도시자치제, 유한회사

日本語 (Japanese)
n. - 法人, 株式会社, 都市自治体, 会社

العربيه (Arabic)
‏(الاسم) شركه, مؤسسه تجاريه, هيئه, مجلس بلدي‏

עברית (Hebrew)
n. - ‮איגוד, תאגיד, חברה, מועצת-עיר, בטן גדולה, כרס‬

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