Tuesday, April 07, 2009


My Slight Knowledge about Corporations

I must start this rambling essay with a disclaimer. I know very little about corporation law. My opinions about corporations, as well as my opinions about most other things, are not unique or original. The world is full of opinions about almost everything, and I choose certain of those opinions and call them mine.

I believe that corporations were started as a means of raising money to build something big and useful, like a bridge, barge canal, or railroad. In a socialistic society these projects would be undertaken by the state, or by the entire population collectively. In our society, these projects were undertaken by a group or a subset of the population whose members had excess money to invest. I don't know how old the corporation is. I do know that much of the infrastructure in our society was built by corporations.

I was told once that there were two ways in which a group of wealthy individuals can pool their money to build something: the partnership and the corporation. In a partnership each individual is responsible for any wrong-doing or costly accident that resulted from the enterprise. In a corporation, each investor is responsible only to the extent of his or her investment. Naturally, cautious investors prefer to buy shares in a corporation rather than members of a partnership.

Today corporations are organized for many purposes other than building railroads, toll roads, bridges, and canals. Medical doctors for corporations to reduce their taxes. Corporations are created to provide entertainment. In fact, most of the things we buy and many of the services we buy are provided by corporations. Grocery chains, restaurant chains, gymnasium chains, etc., are all run by corporations.

The legal responsibilities of corporations and partnerships require that they can be sued in civil court. In the case of a partnership, the problem is simple. A person with a grievance can sue the partners collectively. If he or she wins the suit, at least one of the partners is likely to have funds to pay the claim. Remember that in a partnership, each partner is liable for the full extent of the judgment. In the case of the corporation, the courts had to do some creative engineering. The managers, as shareholders, couldn't be sued for damages. They could, of course, be accused and tried for criminal activity. However, such suits could be brought only by the state or other government. The individuals could be fined or put in prison. However, an individual with a grievance, whether associated with a criminal act or not, could not collect damages.

The creative engineering or judicial activism was to define the corporation as a person so that it could be sued. One judge at the time mused that the corporation was a strange person, lacking a "soul to be damned or an ass to be kicked." The corporation could be forced to pay damages to a successful plaintiff.

In the United States, corporations are chartered under state law. Different states have different chartering requirements. Most corporations prefer to be chartered in the state of Delaware, because it has, or used to have, the least onerous chartering requirements. Corporations do business in many states and do not have to have charters in each state in which they do business. A corporation can be sued in any state in which it does business. Some corporations are trying to get the law changed so that they can be sued only in federal court.
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