Gavin Howe
The existence of corporations under common law is a topic that has been widely discussed in Anglo-American legal history. A corporation is a legal entity that is separate from its owners and has the capacity to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. The development of corporate law has varied across different countries, with the United Kingdom being the first country to draft modern corporation statutes. In the United States, corporations are created and regulated by state laws, with each state having distinct laws regarding incorporation. The history of corporate law in the United States has evolved through various acts and laws, such as the Sherman Antitrust Act and the Delaware General Corporation Law. The concept of a corporation as a common-law entity has been challenged, with some arguing that the trust was a significant legal device that provided similar advantages to businesses.
| Characteristics | Values |
|---|---|
| Legal entity | Separate and distinct from its owners |
| Legal independence | From the shareholders that own it |
| Liability | Limited liability protection for owners and shareholders |
| Management | Managed by a board of directors |
| Ownership | Owned by an individual or group of shareholders |
| Profit | May return a profit to shareholders |
| Tax | Files tax returns with the IRS |
| Formation | Created by filing articles of incorporation with the state |
| Common law | The corporate form was not the exclusive historical source of its legal powers |
| Trusts | Trusts allowed businesses to obtain the same legal advantages as corporations |
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What You'll Learn
Common law trust
A corporation is a business entity that offers its owners a degree of protection from liability. A corporation is a legal entity that is separate and distinct from its owners and is established to conduct business or trade. Corporations are formed by individuals who file articles of incorporation in the state where they intend to operate.
A common law trust is a type of financial agreement that is established through a trust deed. This document outlines the terms under which the trust will operate, including the transfer of ownership from the trustor (the person setting up the trust) to the trustee. The trustee then manages these assets for the benefit of a third party, known as the beneficiary. Trusts can be used to manage and protect assets, ensuring they are distributed according to the trustor's instructions.
In the context of Anglo-American legal history, the common law trust has played a significant role in shaping the development of business law. Historical legal sources suggest that the basic powers of the corporate form were also available through the common law trust, which could mimic the corporate form and provide similar legal advantages. This included limited liability, entity-shielding, capital lock-in, and tradable shares. For instance, out of 880 large business trusts in existence, only four chose to incorporate when the general incorporation statute made it available, indicating a preference for the trust structure.
However, it is important to note that "common law trusts" no longer exist in the same way since all states now have statutes relating to the creation and operation of trusts. The term "common law trust" may refer to a type of trust agreement that supersedes statutory law and is filed directly at a federal jurisdiction, providing advanced rulings based on Supreme Court cases. These types of trusts are more complex and expensive to set up compared to statutory trusts and are typically suited for high-net-worth individuals or family offices with access to experts in this area.
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Corporate personhood
In the United States, the debate around corporate personhood centres on the extension of certain constitutional rights traditionally associated with natural persons to juridical persons, including corporations. This debate gained prominence after the Supreme Court's ruling in Citizens United v. Federal Election Commission in 2010, which upheld the rights of corporations to make unlimited political expenditures under the First Amendment. The concept of corporate personhood, however, predates this ruling and has been a part of American law for a significant period.
The Fourteenth Amendment, adopted after the Civil War in 1868, played a pivotal role in the evolution of corporate personhood. The amendment, intended to grant emancipated slaves full citizenship, included the Equal Protection Clause, which states that no person shall be deprived of life, liberty, or property without due process of law. Former U.S. Senator Roscoe Conkling, who helped draft the amendment, extended the interpretation of "person" to include corporations.
The implications of corporate personhood are far-reaching and often controversial. While it encourages investment and drives economic growth, critics argue that it leads to the influence of ""dark money" in politics and provides corporations with rights intended for humans, such as religious rights. There have been calls for a Constitutional amendment to abolish or curtail corporate personhood, with proposals suggesting that corporations should not be entitled to the same constitutional protections as individuals.
The concept of corporate personhood is not without its complexities. While corporations possess many rights, they do not enjoy all the rights afforded to natural persons. Additionally, the legal treatment of corporations varies across different jurisdictions, with each state in the U.S. having distinct laws regarding incorporation.
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Shareholder liability
Shareholders in a corporation are generally immune from liability. However, there are certain circumstances where they may be held personally liable for the debts or liabilities of the corporation.
Shareholders in a "closed" or "close" corporation are more likely to be held liable for corporate debts, as they are often more involved in day-to-day management and operations. In such cases, shareholders should be particularly aware of the actions taken by their directors, as these may impute liability to the shareholder. Shareholders in a close corporation also owe each other a duty of loyalty and good faith.
Courts are extremely protective of employees of small, close corporations. In the event of corporate dissolution, a court may hold shareholders personally liable for the back wages of the company's employees. Shareholders should therefore ensure that management is paying employees their full wages.
Shareholders must also conform to the standard of "entire fairness" in their dealings. This means that any transaction between a large shareholder and their close corporation must be fair to the company, other shareholders, creditors, and employees, both before and after the transaction is conducted. Any hint of fraud or unfair dealings will often lead the court to rule against the shareholder.
Shareholders may also be held personally liable for the debts of a corporation if they have agreed to be personally liable, such as by acting as a co-borrower or guarantor of a loan. Additionally, a court may impose individual shareholder liability if the shareholder exercised complete domination over the corporation and used it to commit fraud or another wrong against the plaintiff.
In certain situations, federal and state statutes provide for personal liability on behalf of shareholders for certain obligations of a corporation. For example, under New York's Labor Law, certain owners or officers may be held personally liable if they knowingly participate in a corporation's failure to pay its workers the prevailing wages and supplements due by law.
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Incorporation
A corporation is a business entity that is legally separate from its owners and exists to conduct business or trade. It is created when a business is incorporated by an individual or a group of shareholders with a common goal. The process of incorporation establishes a corporation as a legal entity, separate from its owners, and grants it certain rights and responsibilities.
In addition to limited liability, incorporation provides other advantages such as the ability to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. The process of incorporation also involves establishing corporate bylaws, which outline how the corporation will be structured and operated.
The history of corporate law and incorporation practices varies across different countries. For example, the UK required a legislative charter for incorporation until the Joint Stock Companies Act of 1844, while the US saw a gradual shift from incorporation by legislative act to state enactment of corporation laws in the 1830s.
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Corporate governance
In the United States, corporations are created and regulated by state laws, with each state having distinct laws regarding incorporation. Most states require the owners to file articles of incorporation, and they can then issue stock to the company's shareholders. Shareholders elect a board of directors to manage the business, and corporations may return profits to their shareholders. The defining feature of a corporation is its legal independence from its shareholders, who are not personally liable for the company's debts and liabilities. This is known as limited liability protection.
In the United Kingdom, the right to manage a corporation is not laid down in law but is found in the Model Articles, allowing companies to opt-out if they choose. UK law specifically reserves shareholders' rights and duties to approve substantial non-cash asset transactions. The UK was the first country to draft modern corporation statutes, allowing investors to incorporate, limit liability, and delegate management to a centralised board of directors.
The history of corporate law in the US and UK shows the development of corporations primarily as business organisations. The Act Relative to Incorporations for Manufacturing Purposes of 1811 in the US, for example, allowed for free incorporation with limited liability for manufacturing businesses. The UK required a legislative charter for incorporation until the Joint Stock Companies Act of 1844. The formation of a corporation typically required an act of legislature, but state enactment of corporation laws in the 1830s allowed companies to incorporate without a special legislative bill.
The concept of a "common law corporation" has been explored in Anglo-American legal history, challenging the notion that the corporate form was the exclusive source of legal powers for modern businesses. It highlights the role of the common law trust, which allowed businesses to obtain similar legal advantages as corporations, such as limited liability and entity shielding. This suggests that the corporate form may not have been as significant in shaping modern business law as previously thought.
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Frequently asked questions
A corporation is a business entity that offers its owners a degree of protection from liability. It is a legal entity that is separate and distinct from its owners and is established to conduct business or trade.
A corporation may be called a company, but a company should not be called a corporation as they have distinct characteristics. A corporation is legally independent from its shareholders, whereas a company may or may not be a separate legal entity.
The history of corporate law in the US involves the development of the corporation as a business organization under federal regulation. By the end of the 18th century, there were around 300 incorporated companies, most providing public services. The US Supreme Court granted corporations new rights in 1819, deeming corporate charters "inviolable".
To form a corporation in the US, you must file articles of incorporation with the state in which it will be registered. You will also need to get an Employer Identification Number (EIN) through the IRS for taxes and bank accounts.
The common law trust allowed businesses to obtain similar legal advantages to corporations, such as limited liability and entity-shielding. This challenges the idea that the corporate form was the exclusive historical source of the legal powers that enabled modern business.
