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Company law (or the law of business associations) is the field of law concerning companies and other business organizations. This includes corporations, partnerships and other associations which usually carry on some form of economic or charitable activity. The most prominent kind of company, usually referred to as a "corporation", is a "juristic person", i.e. it has separate legal personality, and those who invest money into the business have limited liability for any losses the company makes, governed by corporate law. The largest companies are usually publicly listed on stock exchanges around the world. Even single individuals, also known as sole traders may incorporate themselves and limit their liability in order to carry on a business. All different forms of companies depend on the particular law of the particular country in which they reside.
The law of business organizations originally derived from the common law of England, but has evolved significantly in the 20th century. In common law countries today, the most commonly addressed forms are:
- Limited company
- Unlimited company
- Limited liability partnership
- Limited partnership
- Not-for-profit corporation
- Company limited by guarantee
- Sole Proprietorship
Many countries have forms of business entity unique to that country, although there are equivalents elsewhere. Examples are the limited liability company (LLC) and the limited liability limited partnership (LLLP) in the United States.
Other types of business organizations, such as cooperatives, credit unions and publicly owned enterprises, can be established with purposes that parallel, supersede, or even replace the profit maximization mandate of business corporations.
For a country-by-country listing of officially recognized forms of business organization, see Types of business entity.
There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:
- a company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company .
- a company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.
- a company limited by shares. The most common form of company used for business ventures.
- an unlimited company either with or without a share capital. This is a hybrid company, a company similar to its limited company (Ltd.) counterpart but where the members or shareholders do not benefit from limited liability should the company ever go into formal liquidation.
There are, however, many specific categories of corporations and other business organizations which may be formed in various countries and jurisdictions throughout the world.
United States company law
In the United States, corporations are generally incorporated, or organized, under the laws of a particular state. The corporate law of a corporation's state of incorporation generally governs that corporation's internal governance (even if the corporation's operations take place outside of that state). The corporate laws of the various states differ - in some cases significantly - from state to state. Because of these differences, corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate, and a majority of public companies in the U.S. are Delaware corporations. The federal laws of Nigeria and local law may also be applicable sources of corporate law.
Company law theory
“A corporation is described to be a person in a political capacity created by the law, to endure in perpetual succession.” Americans in the 1790s knew of a variety of corporations established for various purposes, including those of commerce, education, and religion. As the law of corporations was articulated by the Supreme Court under Chief Justice Marshall, over the first several decades of the new American state, emphasis fell, in a way which seems natural to us today, upon commercial corporations. Nonetheless, Wilson believed that, in all cases, corporations “should be erected with caution, and inspected with care.” The actions of corporations were clearly circumscribed: “To every corporation a name must be assigned; and by that name alone it can perform legal acts.” For non-binding external actions or transactions, corporations enjoyed the same latitude as private individuals; but it was with an eye to internal affairs that many saw principal advantage in incorporation. The power of making by-laws was “tacitly annexed to corporations by the very act of their establishment.” While they must not directly contradict the overarching laws of the land, the central or local government cannot be expected to regulate toward the peculiar circumstances of a given body, and so “they are invested with authority to make regulations for the management of their own interests and affairs.”
The question then arises: if corporations are to be inspected with care, what - if not the commercial or social conduct, or the by-laws - is to be inspected – and by whom? Do corporations have duties? Yes: “The general duties of every corporation may be collected from the nature and design of its institution: it should act agreeably to its nature, and fulfill the purposes for which it was formed.” Who sees that corporations are living up to those duties? “The law has provided proper persons with proper powers to visit those institutions, and to correct every irregularity, which may arise within them.” The Common Law provided for inspection by the court of king’s bench. In 1790, at least, “the powers of the court of king's bench [were] vested in the supreme court of Pennsylvania.” As for the dissolution of corporations, there seems not to have been much question that a corporation might “surrender its legal existence into the hands of that power, from which it was received. From such a surrender, the dissolution of the body corporate ensues.” Nor does there seem to have been much question that by “a judgment of forfeiture against a corporation itself, it may be dissolved.” However, Supreme Court Justice Wilson, lecturing in his unofficial capacity, at least, suggests not his displeasure with the doctrine that corporate dissolution cannot be predicated “by a judgment of ouster against individuals. God forbid ― such is the sentiment of Mr. Justice Wilmot ― that the rights of the body should be lost or destroyed by the offenses of the members.”
As theorists such as Ronald Coase have pointed out, all business organizations represent an attempt to avoid certain costs associated with doing business. Each is meant to facilitate the contribution of specific resources - investment capital, knowledge, relationships, and so forth - towards a venture which will prove profitable to all contributors. Except for the partnership, all business forms are designed to provide limited liability to both members of the organization and external investors. Business organizations originated with agency law, which permits an agent to act on behalf of a principal, in exchange for the principal assuming equal liability for the wrongful acts committed by the agent. For this reason, all partners in a typical general partnership may be held liable for the wrongs committed by one partner. Those forms that provide limited liability are able to do so because the state provides a mechanism by which businesses that follow certain guidelines will be able to escape the full liability imposed under agency law. The state provides these forms because it has an interest in the strength of the companies that provide jobs and services therein, but also has an interest in monitoring and regulating their behavior.
Company law study
Law schools typically offer either a single upper level course on business organizations, or offer several courses covering different aspects of this area of law. The area of study examines issues such as how each major form of business entity may be formed, operated, and dissolved; the degree to which limited liability protects investors; the extent to which a business can be held liable for the acts of an agent of the business; the relative advantages and disadvantages of different types of business organizations, and the structures established by governments to monitor the buying and selling of ownership interests in large corporations.
The basic theory behind all business organizations is that, by combining certain functions within a single entity, a business (usually called a firm by economists) can operate more efficiently, and thereby realize a greater profit. Governments seek to facilitate investment in profitable operations by creating rules that protect investors in a business from being held personally liable for debts incurred by that business, either through mismanagement, or because of wrongful acts committed by the business.
- Delaware Division of Corporations
- Wilson, James. Lectures on Law, delivered 1790-91 at University of Pennsylvania, Vol. II, ch. X, “Of corporations.”
- Kraakman, Reinier H.; et al. (2004). Anatomy of Corporate Law: A Comparative and Functional Approach. New York: Oxford University Press. ISBN 0-19-926063-X.
- Lowry, John; Dignam, Alan (2006). Company Law. New York: Oxford University Press. ISBN 0-19-928446-6.
- "A Comparative Bibliography: Regulatory Competition on Corporate Law". (Georgetown University Law Center Working Paper).