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A corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a natural person. Civil law systems may refer to corporations as "moral persons;" they may also go by the name "AS" (anonymous society) or something similar, depending on language (see below).
The word "corporation" derives from the Latin corpus (body), representing a "body of people"; that is, a group of people authorized to act as an individual (Oxford English Dictionary). The word universitas also used to refer to a group of people but now refers specifically to a group of scholars (see University). However, in colloquial usage "corporation" usually refers to a commercial entity set up in accordance with a governmental framework.
Churches, interest-groups (both can form as not-for-profit corporations or can exist as voluntary associations), cities and townships (often chartered as public corporations), among others, may also have historically lengthy corporate identities.
The corporation simply as a legally separate entity
Older corporate entities gained incorporation as "the person/people of xx". This reflected the people who made up the "body" and also emphasised their legal identity. The law classifies a corporation either as a corporation sole (one person) or as a corporation aggregate (any other number).
Examples include (the link gives the legal name; the nickname appears in brackets with the nature of the corporation)
Using strict definitions, universities and colleges count as corporations since they merely comprise groups of people.
Corporations in some jurisdictions do not need to make reference to their membership. For example:
Modern usage tends not to refer to the membership when incorporating corporations.
Within the official framework, a corporation, or in some jurisdictions a company, forms a legal, artificial entity with or without shareholders. In common law countries, the classic statement of this principle is found in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd , where Lord Haldane said:
- "My Lords, 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."
Humans, trusts, other corporations or other legal entities can hold shares. When no stockholders exist, a corporation may exist as a "non-stock corporation", a "membership corporation", or similar — this second type of corporation counts as a not-for-profit corporation. In either category, the corporation comprises a collective of individuals with a distinct legal status and with special privileges not vouchsafed to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals. Corporations receive a charter from a state, and become regulated by the laws enacted by that state. The law of the state in which a corporation operates (if different from the state in which it originates) will generally regulate its activities.
Certain 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 to a sole proprietorship, or even, archaically, to a group of not necessarily related people (for example, those staying in a tavern).
Names in different jurisdictions
There are various types of corporations throughout the world.
Terms like those on the list above, known as words of limitation, obviously vary by jurisdiction and language. Their use puts all persons on constructive notice that they have to deal with an entity whose liability remains limited, in the sense that it does not reach back to the persons who constitute the entity; one can only collect from whatever assets the entity still controls at the time one obtains a judgment against it.
Generally speaking, any corporation, whether domestically created or foreign (from another jurisdiction) must register in order to conduct business in that jurisdiction. As part of this registration, it must designate the principal address of the corporation (where to contact it in the event of legal process).
The law typically views a corporation as a fictional person, a legal person, or a moral person (as opposed to a natural person); United States law recognises this as corporate personhood. Under such a doctrine (obviously a legal fiction), a corporation enjoys many of the rights and obligations of individual citizens, such as the ability to own property, sign binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a corporation cannot vote.)
Typically, a board of directors governs a corporation; that board has a fiduciary duty to look after the interests of the corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers — manage the affairs of the corporation.
Benefits of forming a corporation
The most salient features of incorporation include:
(1) Limited Liability. Unlike in a partnership, stockholders of a corporation hold no liability for the corporation's debts and obligations. As a result their "limited" potential losses cannot exceed the amount which they paid for the stock. Not only does this allow corporations to engage in risky enterprises, but limited liability also forms the basis for trading in corporate stock. Without the limitation on the amount that an investor can lose, the time and effort required to determine whether the stock could wipe the investor out would render the stock market very illiquid (as one can observe in the very illiquid market for partnership interests). A lender can, however, require a personal guarantee on a loan to a corporation, thus introducing personal liability.
(2) Perpetual Lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, officers or directors. This allows for stability of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution. This feature also had great importance in the medieval period, 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.
Early corporations of the commercial sort — such as the Dutch East India Company—formed under frameworks (set up by governments of states) to undertake tasks which appeared too risky or too expensive for individuals or governments to embark upon. Such corporations came to play a large part in the history of corporate colonialism.
Corporations have been present in some forms, however, as far back as Ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, they nonetheless were enterprises, sanctioned by the state, with a form of shareholders who invested money for a specific purpose.
With the collapse of the Roman Empire, the rise of Christianity and the influx Germanic tribes, the Roman conception of the coporation merged with other views. Germanic tribes for example, maintained that a group entity in and of itself could have a separate identity from that of its members.
These influences came together in the body of canon law built around the conception of the church as corporate structure in the Middle Ages. Different theories of the church as corporate body were favored by different individuals but all agreed on one key component: that the church was more than just its members and could maintain an exsistence perpetually, regardless of the death of any individual member. This together with discussion as to the relationship between the head of a corporation (such as the Pope) and its members contributed not only to the development of modern corporations and corporate theory but also set the stage for many ideas that would come to fruition during the enlightenment.
Kenneth Pomeranz, an economic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war) accounts for the development of this economic structure in Europe but not in China or in the Middle East.
The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, reportedly obtained a charter from King Magnus Eriksson in 1347.
Main article: non-profit organization
In modern economic systems, the corporate conventions of governance commonly appear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, the courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or in a similar manner) when applying principles to non-profit organizations — as the underlying structures of these two types of entity often resemble each other.
In the United States, several corporate forms exist; the name of "corporation" generally applies to a business, run for profit, to which one of the states of the United States (or other governmental body with that power, including Congress and Puerto Rico) has granted a corporate charter. The federal government of the United States usually does not grant corporate charters to businesses (exceptions include public corporations such as the United States Postal Service and Amtrak). American corporations typically charter as a Delaware Corporation in Delaware, which charges no tax on activities outside the state and has courts experienced in commercial law. Corporations set up for privacy or asset protection often charter in Nevada, which allows setting them up with no record of who owns them.
Historically, most U.S. states issued charters for fixed lengths of time (for example, a manufacturing corporation might receive a charter good for 40 years), and only by an act of the legislature. In theory, a limited charter forced corporations to remain accountable to government (that is, to the community) for the special privileges granted to them. Investors protested that it actually led to unhealthy amounts of political payoffs and graft. Most states now charter unlimited-term corporations for a small fee, and possibly for a yearly tax.
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.
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 globalising.
The typical "transnational" or "multinational" may fit into a web of overlapping ownerships and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansion may favour 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 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.
Dynamics of a public corporation
The institution most reference when they use the word "Corporation", such as in the movie The Corporation, is a publicly traded corporation. Most of the largest businesses in the world are publicly traded corporations. Publicly traded corporations have some distinct properties which shape the way they act, and which then shape the societies which they are a part of:
- In general, management of publicly traded corporations are thought to have a fiduciary duty to always increase the amount of profit made. This is because the owners of the corporation, the stockholders, are interested in "buying low and selling high", and the main driver in the long term of a rising stock price is increasing profits (and the perception that the profits will continue to increase). Most corporations have set their entire focus and pay of all management to this focus, via things like stock options and other bonuses. Thus neither stockholders nor management are primarily concerned about how large or profitable a corporation currently is, but how much more profitable it can become. Critics of corporations say that this drive for increasing profitability puts pressure on corporations to break the bounds of morality and do things like harm the environment.
- Since the focus of management and the stockholders is usually the concept of "buy low, sell high", and the current price of the stock of a company is primarily influenced by the level of belief in sustained future growth, corporations will often engage in actions designed primarily to increase this belief. For example, Altria Group (formerly Philip Morris) has been criticized by some for being a gigantic corporation owning a large number of brands sold in US stores. Yet, as said before, both the stockholders and management are only secondarily concerned with how big the company is. Some of its lines of business, such as the US tobacco business, are thought to be risky and have little potential for profit growth, while the majority of its other businesses are thought to be stable and contain potential for quick future growth. The dim prospects of the tobacco segment, however, are thought to disproportionately weigh down the stock price of the entire company. Thus, management is seriously considering splitting the company, for the primary reason of allowing each segment to be valued properly, which they feel will make the separate stock prices higher than the combined stock prices.
In the United States
In the US, business corporations owe taxes according to several different categories. The United States Internal Revenue Service classifies organizations as associations (taxable as corporations), partnerships (not limited to common-law partnerships) or trusts ("ordinary trusts"). [see 26 CFR §§301.7701-2 through 301.7701-4]
The United States federal taxation system recognises two types of corporations for taxation purposes:
C-Corp — The most common form of corporation, the C-corporation has few ownership restrictions and must pay corporate taxes; all publicly traded corporations have C-corporation status. C-corporations pay income taxes just as an individual does, and C-corporations do not receive a deduction on dividends they pay to stockholders. This leads to the so-called "double-taxation" of corporate profits: a given profit becomes subject to income tax twice, once at the corporate level, as an item of income, and once at the stockholder level, as a dividend.
S-Corp — Commonly used by small business proprietors, the S-corporation pays no corporate taxes, but instead passes profits and losses directly to its owners (the stockholders) who declare such profits and losses as part of their personal taxable income. In this manner S-coporations resemble partnerships, although some subtle differences in taxation exist. As a result, S-corporations do not become subject to the "double-taxation" that C-corporations enjoy. However, not all corporations qualify for S-corporation treatment. An S-corporation must generally have no more than 75 stockholders, all of them natural persons (not other corporations or entities), and all of them residing in the United States; moreover, the S-corporation can only issue a single class of stock.
Other related types of commercial entity
Partnerships, limited partnerships, and limited liability partnerships
A partnership comprises a contractual agreement between individuals and/or corporations which share profits and losses. It resembles a sole proprietorship, but it has multiple members, each called a "partner". A partnership does not constitute a separate entity and the partners all retain liability for the debts of each fellow-partner (if contracted to on behalf of the partnership). Usually a partnership will not survive the death of one of the partners (though it may undergo reorganization at that time).
A partnership can have general partners and limited partners (also known as "silent partners"). General partners retain liability for all of the debts and obligations of the partnership. Limited partners, on the other hand, retain liability only for the amounts they have specifically agreed to contribute to the partnership pursuant to the partnership agreement.
A U.S. limited liability partnership (LLP) comprises a partnership composed entirely of limited partners without any general partner. For historical reasons most U.S. jurisdictions restrict limited liability partnership to associations of learned professionals such as lawyers and doctors. However, this restriction has become fairly meaningless, since a limited liability company can achieve the same legal result.
Limited Liability Partnership (UK)
The UK Limited Liability Partnership (LLP) was introduced by the Limited Liability Partnerships (2000) Act with effect from 6 April 2001.
The UK LLP is not legally a partnership but is in fact a body corporate. A UK Limited Liability Partnership has members rather than partners, and a Limited Liability Partnership Agreement governs its activities. There is not even a requirement for this agreement to be in writing since simple default provisions based upon partnership principles apply by way of default.
The UK LLP has collective limited liability, so that Members cannot lose more than they have invested in the LLP.
Two or more Designated Members are responsible for complying with administrative provisions such as the maintenance and filing of Annual Accounts — where standards are based upon UK Companies Law.
For tax purposes the LLP is tax transparent which means that the UK Inland Revenue treats it as though it is a partnership, and no corporate taxes are therefore payable.
The UK LLP is based upon the earlier implementation by Jersey of an LLP form. The difference being that in Jersey, as in many other jurisdictions, partnerships may have a separate legal existence whereas in England and Wales they do not, which means that partnerships cannot legally own property nor contract in their own name. For this reason it was necessary to make the UK LLP a body corporate.
The UK LLP is probably the simplest, most flexible and effective corporate body yet devised.
Limited liability Company
The limited liability company (LLC) resembles a partnership in that it provides a very flexible structure. A limited liability company has members, rather than partners; and an operating agreement (rather than a partnership agreement) governs its activities. Otherwise an LLC very much resembles a partnership in that the members can contractually arrange in the operating agreement for the management and economic provisions that they wish.
Many lawyers and businesspersons prefer the limited liability company form of taxation because of its extreme flexibility and favorable tax treatment.
One other type of business entity can exist: the business trust , most often used as a vehicle for investment purposes. Only a few jurisdictions allow for the creation of business trusts, most notably Massachusetts; many mutual funds function as Massachusetts business trusts. In many jurisdictions the business trust has become popular as a vehicle for investing in real estate, forming real estate investment trusts or REITs (pronounced reets).
Taxation of non-corporate entities
Since 1996, United States partnerships and limited liability companies have had the right to elect whether the United States government will treat them as corporations or as "flow-through" entities under the IRS' check-the-box regulations (see form 8832). The income tax assessment process does not treat a flow-through entity as a person for income tax purposes; instead it divides its income and loss (and every other tax attribute) among its partners, who report them proportionately to the IRS. Some limits exist on an entity's ability to elect flow-through treatment: most importantly, a publicly traded company cannot elect flow-through treatment; in practice this means that publicly traded corporations remain subject to a more stringent tax régime than do closely held companies.
Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like. —Lord Thurlow
The opinion of the Court, after mature deliberation, is that this [a corporate charter] is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. —Chief Justice John Marshall, Dartmouth College v. Woodward (1819).
- The Corporation (a 2003 documentary film about "today's dominant institution")
In the United Kingdom and Republic of Ireland, the term corporation was also used for the local government body in charge of a borough. This style was replaced in most cases with the term council in the United Kingdom in 1973, and in the Republic of Ireland in 2001. The sole exception is the Corporation of London which retains the title.
Last updated: 06-02-2005 05:23:37