A corporation is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. Incorporated entities have legal rights and liabilities that are distinct from their employees and shareholders, and may conduct business as either a profit-seeking business or not for profit business. Early incorporated entities 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 corporations tend to have limited liability, be owned by shareholders who can transfer their shares to others, and controlled by a board of directors who are normally elected or appointed by the shareholders.
In American English the word corporation is widely used to describe large incorporated businesses. In British English and in the commonwealth countries, the term limited company is more widely used to describe the same sort of entity while the word corporation encompasses all incorporated entities. In American English, the word company can include entities such as partnerships that would not be referred to as companies in British English as they are not a separate legal entity.
Despite not being human beings, corporations, as far as the law is concerned, are legal persons, and have many of the same rights and responsibilities as natural people do. Corporations can exercise human rights against real individuals and the state, and they can themselves be responsible for human rights violations. Corporations can be "dissolved" either by statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate failure, when creditors force the liquidation and dissolution of the corporation under court order, 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 considered living entities in the way that humans are.
The word "corporation" derives from corpus, the Latin word for body, or a "body of people." By the time of Justinian (reigned 527-565), Roman Law recognized a range of corporate entities under the names universitas, corpus or collegium. These included the state itself (the populus Romanus), municipalities, and such private associations as sponsors of a religious cult, burial clubs, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives. Private associations were granted designated privileges and liberties by the emperor. Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India. 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. 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)
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. 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.
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.[unreliable source?] 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. Corporate charters were deemed "inviolable", and not subject to arbitrary amendment or abolition by state governments. The Corporation as a whole was labeled an "artificial person", possessing both individuality and immortality.
At around the same time, legislation in the United Kingdom 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. 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.
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. " The major error of the second part of this judgment was recognised by the same magazine more than 70 years later, when it claimed that, "[t]he economic historian of the future. . . may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution. "
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) 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 (or 'nationalised') 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.
Ownership and control
A corporation is, at least in theory, owned and controlled by its members. In a joint-stock company the members are known as shareholders and each of their shares in the ownership, control and profits of the corporation is determined by the portion of shares in the company that they own. Thus a person who owns a quarter of the shares of a joint-stock company owns a quarter of the company, is entitled to a quarter of the profit (or at least a quarter of the profit given to shareholders as dividends) and has a quarter of the votes capable of being cast at general meetings.
In another kind of corporation the legal document which established the corporation or which contains its current rules will determine whom 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 former's management of the company.
- A two-tiered committee structure with a supervisory board and a managing board is common in civil law countries.
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.
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. Their use puts everybody on constructive notice that they are dealing with an entity whose liability is limited: 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).
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.
- Definition of a "corporation" from Reference.com
- Pettet, B. G. (2005). Company Law. Pearson Education. p. 151. "Reading the above, makes it possible to forget that the shareholders are the owners of the company."
- Courtney, Thomas B. (2002). The Law of Private Companies (2nd ed.). Bloomsbury Professional. 4.001. "As a corporation, or body corporate, a private company is regarded in law as having a separate legal personality from its shareholders (owners) and directors (managers)."
- corporation. CollinsDictionary.com. Collins English Dictionary - Complete & Unabridged 11th Edition. Retrieved December 07, 2012.
- Emberland, Marius (2006). The Human Rights of Companies: Exploring the Structure of ECHR Protection. Oxford University Press. p. 1. ISBN 978-0-19-928983-7. Retrieved 2 June 2012.
- e.g. South African Constitution Art.8, especially Art.(4)
- Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993) discusses the controversial nature of additional rights being granted to corporations.
- See, for example, the Business Corporations Act (B.C.) [SBC 2002] CHAPTER 57, Part 10
- e.g. Corporate Manslaughter and Corporate Homicide Act 2007
- Harold Joseph Berman, Law and Revolution (vol. 1): The Formation of the Western Legal Tradition, Cambridge: Harvard University Press, 1983, pp. 215-16. ISBN 0674517768
- Vikramaditya S. Khanna (2005). The Economic History of the Corporate Form in Ancient India. University of Michigan.
- Om Prakash, European Commercial Enterprise in Pre-Colonial India (Cambridge University Press, Cambridge 1998).
- John Keay, The Honorable Company: A History of the English East India Company (MacMillan, New York 1991).
- Ibid. at 113.
- The Law of Business Organizations, Cengage Learning
- Trustees of Dartmouth College v. Woodward, 17 U. S. 518 (1819).
- Id. at 25.
- Id. at 45.
- 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).
- 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).
- 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  and .
- Economist, December 18, 1926, at 1053, as quoted in Mahoney, supra, at 875.
- 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).
- Besley, Scott; Brigham, Eugene (2008). Principles of Finance (4th ed.). Cengage Learning. p. 105. ISBN 9780324655889. "A credit union is a depository institution that is owned by its depositors..."
- "Company & Commercial - Netherlands: In a nutshell - one-tier boards". International Law Office. 10 April 2012.
- 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.
- A Comparative Bibliography: Regulatory Competition on Corporate Law
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- Low, Albert, 2008. "Conflict and Creativity at Work: Human Roots of Corporate Life, Sussex Academic Press. ISBN 978-1-84519-272-3
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