Key1 The corporation: a beast with unlimited potential and limited liability
When first introduced to the novel concept of corporations as a means for financing and operating a business, Adam Smith concluded that they would prove to be dysfunctional beasts. Smith, the 18th century expounder of the virtues of capitalism, thought such a business venture, with so many owners, could not possibly succeed.
Adam Smith may have been right about capitalism, but the great economist was wrong about corporations. They are the heart of American business.
Corporations first existed in the Middle Ages for the operation of towns, universities and ecclesiastical orders---for the good of the whole, those with common interests joined together to operate their enterprises. In municipal, educational and religious corporations, individual members pooled resources and reaped the rewards. The publicly-supported monks tilled the garden, the parishioners ate. The city collected taxes to build the roads and the residents benefited from fewer wheel replacements. The universities operated the libraries and the citizens had access to books. With the development of commerce, the corporate operation migrated to the business world. Those with ideas produced and sold goods using investor funds and those investors (shareholders) split the profit.
Suddenly with this new corporate beast which allowed easy investment by multiple owners, economic growth knew no bounds.
Moreover, the birth of this new commercial creature brought with it the bonus of limited liability. If a corporation is created properly and operated well, the only liability its owners, the shareholders, face is the loss of their investment in the firm. In a well-run corporation, none of the personal assets of any shareholder is subject to the claims of the corporation’s creditors. Without such protection, there would be much less investment. With it, this combination of many investors furnishing capital collectively without the risk of losing their own personal shirts has been sufficient motivation to finance everything from a voyage to a new world to the Model-T.
First seen in the United States with the Pilgrims and their Mayflower Company, corporations have continued their dominance of American business. They have created jobs, wealth, culture and a financial market that is now a depository for the funds of most working and retired adults. Americans in particular find corporations to be quite an efficient way to run a business and certainly a welcome entrée into the world of capital gains and dividends.
A corporation is a statutory creature. It requires the proper public filing of a document, called articles of incorporation, that identifies its creators (called incorporators) and provides information on its structure and purpose. Articles of incorporation list the name of the corporation, its classes and types of shares and includes the name of a contact person for communication with the company. Once the articles of incorporation are filed properly and any additional steps, such as public notice of incorporation are complete, the newly formed entity is recognized by the state as a corporation.
Those who have invested in the corporation and own an interest-the shareholders-enjoy the limited liability afforded this creature of the state dating back to 15th century England.
Shareholders’ limited liability, however, is in jeopardy if they fail to treat the property and funds of the corporation as separate. The operation of a corporation requires formalities in everything from, approval of transactions to filing annual reports. It would be impossible for a corporation if 50, let alone 10,000, shareholders were left to manage operations and fulfill the formality requirements. The duty of compliance and management of the corporation is delegated by the shareholders to the board of directors, who in turn can delegate responsibility to officers and employees.
The following keys examine the role of the shareholders, directors and officers in running a successful corporation. Corporations are magnificent beasts, which, if governed properly, provide maximum, return on investment with little personal risk.
