In Defense of Corporations; They Revolutionized the World

During the years President Obama has been in office, corporations have been vilified.

It goes without say that corporations, like individuals, can behave badly and even criminally. But without corporations, there would be no modern America as we know it. It is not an overstatement to say that the "corporate form" allowed American business to produce the greatest economy that the world has ever known.

The corporation is not a modern invention. It was recognized in Roman Law in the Code of Justinian (reigned 527-565). The Dutch chartered the Dutch East India Co.; Charles II, the Hudson Bay Co. But such corporations were created by Royal or parliamentary grants.

In 1844, William Gladstone (England) and his Parliamentary Committee on Joint Stock Companies produced the Joint Stock Companies Act of 1844. It allowed establishing of a company as a separate legal person. The advantages largely were administrative; the act allowed creation of a unified entity to handle the affairs of the investors. It could sue and be sued just like a natural person. No longer did all the shareholders have to be named as plaintiffs, and no longer did all have to be individually named and served with process to be made defendants. The corporation also could buy, sell own and mortgage property.

It was not until 1855, however, that the English Parliament passed the Limited Liability Act that allowed investors to limit their liability in the event of business failure to the amount they had invested in the company, Shareholders now were liable directly to creditors only to the the extent that they had not paid for their shares in full. New York had passed a limited liability act for shareholders in 1811, but only to shareholders in "manufacturing" corporations.

These laws taken together allowed the financing of the Industrial Revolution. No longer did investors have to wheedle a royal or parliamentary grant. For the first time in history, it was possible for ordinary people to create a "corporation" through a simple registration procedure. Corporations now could have a perpetual existence. The business no longer had to "wind up," as in the case of the death of a member of a partnership. The business could sue and be sued. It could buy, sell, own and mortgage property as if it were an individual. Finally, English investors could pool funds to raise the giant pools of money needed to create railroads, steamship lines and great manufacturing concerns.

Limited liability meant that an investor could choose to risk a portion of his net wealth, without fear that if the venture went bankrupt the rest of his fortune would be seized to pay the debts of the venture. This was also fair to the creditors of the corporation because they knew up front the "authorized capital" of the business -- the total pool of money put at risk by the stockholders.

While there were earlier corporation acts in America, the Delaware General Corporations Act of 1899 has been the model for other such acts in the county.

It allowed any three or more persons to establish a corporation for the transaction of any legal business.

The Delaware Act of 1899 gave corporations the following powers:

1. To have a perpetual existence;

2. To sue and be sued;

3. To hold, purchase, mortgage and convey real and personal property for its corporate purposes;

4. To appoint officers and agents as required for its business purposes, and to suitably to compensate them;

5. To make bylaws fixing the number of directors to manage the affairs of the corporation.

The Certificate of Incorporation was required to (a) state the name of the corporation, (b) its principal place of business, (c) the nature of the business to be transacted, (d) the total authorized capital stock of the corporation (not less than $2000), (e) when the corporation was to commence operations, (f) whether its existence was limited or perpetual, and (g) whether the private property of stockholders shall be subject to the payment of corporate debts, and if so to what extent.

In a further effort to protect creditors, the corporation was barred from paying stockholders a dividend except out of surplus or net profits, and required to make accurate financial reports.

The advantages of the corporate form are obvious. When an individual dies, his business ends. When a partner dies, the partnership is dissolved, and a new partnership has to be set up, if the business is to continue. When a shareholder or a director of the corporation dies, the business goes on.

When an individual opts to go into business as an individual, he not only exposes his investment to creditors, he also exposes his entire wealth to their claims. The same is true of a traditional partnership or tradition joint venture. (Yes, there can be limited liability partnerships).

Limited liability allows the corporation to go to hundreds, thousands or even ten thousands of investors to raise the enormous sums necessary to finance an airline, a canal or even a company to put privately-owned satellites in orbit.

A corporation can abuse the powers granted to it. But so can a person, a partnership, an association or a government. Corporations aren't perfect because they are run by people. But at their worst, they have never been as bad a governments (e.g., Hitler's Germany and Stalin's Russia).

Without them, America would not have great railroads, airlines, auto companies, computer companies and charitable foundations. And we might well have lost World War II.

Today it is fashionable to be against allowing corporation to make political donations and expenditures. But corporations are people: managers, employees, and stockholders.

When individuals, associations, unions, PACs and the government speak against corporations and demand laws that control how corporations do business, basic fairness requires that corporations have the right, on behalf of themselves and their directors, stockholders, employees and customers, to make corporate expenditures and support politicians who are sympathetic to the their interests and those of their stockholders, customers and employees. Just because a person is employed by a corporation, he doesn't surrender his right of free speech if he happens to speak for a corporation.

If corporations speak falsely, the preferred 1st Amendment remedy is not to bar them from speaking; it's counter-speech to expose their falsehoods.

Posted Online:  May 06, 2014, 11:00 pm - Quad-Cities Online
by John Donald O'Shea

Copyright 2014
John Donald O'Shea