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History of Corporations

Updated on September 5, 2009

The origins of the corporation are the subject of debate. Some authorities profess to see in the group character of primitive societies the fundamental notion of a corporate whole existing even before the individual was regarded as a distinct entity. The family too has been regarded as a kind of corporation: it is a permanent body with perpetual succession, forming one individuality over and above its members. In addition to the family and other kinships divisions, there were ceremonial and ritualistic organizations that were corporate entities in the same sense.

Ancient Times

Similar group formations existed in the ancient civilizations of Asia Minor and in the early Greek and Roman societies. The Romans developed a number of forms of organizations that were similar in many ways to the corporation. Roman municipal organizations gradually assumed duties in public affairs and engaged in activities that required the ownership of property. The organizations possessed a number of the attributes of corporations, including continuous existence regardless of changes in membership. Similar organizations sprang up among priests and other religious and military groups. Business enterprise, however, appears to have typically taken the form of the societas, which is more nearly akin to the partnership than the corporation. It remains an unsettled question among scholars whether or not the Romans conceived of their form of organization as a separate legal person.

Middle Ages

In the centuries that followed the decline of the Roman Empire there was little scope for business association. Although trade and commerce did not die out altogether, they did decline. The manor of feudal times was relatively self-sufficient, and distant trade was difficult and at times impossible without military protection and civil order. When trade and commerce did expand in the 12th and 13th centuries in northern Italy, southern Germany, and the towns along the Baltic, they probably did not draw upon Roman experience but evolved forms of organization to suit their needs.

Trade with the Near East revived with the Crusades, and the Italian seaports became the center of a large Mediterranean trade. Because these shipping ventures required substantial amounts of capital, new forms of business organizations evolved. Typically they were partnerships called commenda. In the commenda one partner, the tractator, undertook the active management of the enterprise, and the other partner, the commendator, supplied the capital. As time went on, this form of organization became more complex, sometimes having more than one tractator and commendator. Typically these arrangements were made for a single venture, but sometimes they were employed for long periods and for more than one venture.

Because the expeditions of the military forces of Italian city-states required substantial amounts of capital, large partnerships, or maone, were formed. These partnerships were granted a share in the profits resulting from the expedition. Associations known as compere were formed to provide loans for the city-states; in return they received special privileges in returns from public revenues. The maone and compere have frequently been regarded by scholars of medieval history as early forms of the corporation. At least one such association, the Casa di San Giorgio, made up of creditors in Genoa in 1408, eventually became a corporation and existed until 1817.

The growth of trade and commerce in central Europe proceeded at a slower pace than in the south. The commenda and other forms of partnership evolved as business units, but whether this evolution was attributable to Italian influence is a subject of dispute. The House of Fugger was such a partnership. Its continued existence was a result of the constant renewal of short-term agreements.

Nonbusiness corporations for both ecclesiastical and public purposes were common in medieval Europe, and the church appears to have been the most direct link between Roman legal views of organization and those that developed in English common law. Church property had come to be considered as separate and distinct from the natural person who held office. The opposition of the church to free incorporation was crystallized by Pope Innocent IV, who reigned from 1243 to 1254, and regarded the church as having the exclusive privilege of granting such charters. Kings began to grant corporate privileges to towns and nonreligious organizations, so that the notion of a grant of power from a sovereign authority became established.

Although the church made important contributions toward the concept of the corporate personality, it was in public municipal affairs that the concept was developed. Cities and towns occupied a somewhat anomalous position in European feudal society. Typically they sought from the monarch or feudal lord—often through purchase—a charter granting them rights and privileges that included a degree of self-government, security of land tenure, the right to collect revenues, and freedom from payment of market tolls. The privileges, highly prized, came to be passed on, so that eventually in the eyes of the law the city became a separate person with continuous existence. By the 14th century the English borough, for example, had come to assume a quasi-corporate character.

Early Modern Period

The development of more complex business organizations emerged with the growth of trade. It was in England where this growth and expansion was most rapid and continuous, and where, accordingly, the evolution of business organization may be most completely observed.

For many centuries the guild with its confining restrictions upon innovation sufficed the needs of the limited production and trade in goods. However, with the growth of commerce along the North Sea as a result of the activity of towns that joined the Hanseatic League, the wool trade prospered, and England became a major source of supply of wool. Originally German and Italian merchants dominated this trade, and it was only by developing a national organization, the Company of the English Merchant Staplers, in the 14th century, that early English merchants came to control the export of wool. By the 16th century the development of spinning and weaving in England led to the decline of the Merchant Staplers and the growth of another organization, the Merchant Adventurers, who exported finished cloth rather than wool. England became a great center for the wool textile trade, exporting cloth to continental Europe.

With the discovery of the Americas, the shift in trade from the Mediterranean to the Atlantic, and the growth of commercial activity, Britain became an increasingly important center of trade. The companies that developed frequently had monopolistic privileges in their own trading areas. Thus the Merchant Adventurers had exclusive rights to send cloth to market between the mouth of the Somme River (in northeast France) and the tip of Denmark. The Eastland Company, formed in the early 15th century (though it was not chartered until 1579) had similar privileges in Scandinavia, Poland, and the east coast of the Baltic. The Muscovy Company (1555) dominated the Russian trade. The Turkey or Levant Company, chartered in 1581 and again in 1592, had special privileges in the Turkish trade.

Companies were of two kinds—the regulated company and the joint stock company. The regulated company was an association of men who ran their own ventures, transacted their own business, and made their own profits subject to the regulations of the company. The joint stock company was an association of capital through individual shareholders who elected or appointed officers to administer the fund. Some companies that started as joint stock companies shifted to become regulated companies. Nevertheless it was the joint stock company that was in the mainstream of corporate development.

In their early development of English trading companies, those firms organized as joint stock companies usually invested their capital for a single voyage. Gradually a more permanent form of organization took hold. Whether this evolution was the result of increasing commerce and trade or reflected an awareness of the earlier developments in Italian cities is a matter of dispute. The development of the English East India Company (founded in 1599 and chartered by Queen Elizabeth I in 1600) illustrates the modification that took place. The early voyages were financed by individual contributions from among its members who felt inclined to participate. When the voyage ended and an accounting had been made, the participants got back their capital plus a share in the profits. Investors were frequently invited to leave their investment for the next voyage. In 1613 capital was raised to cover four voyages, and in 1617 to cover seven. However, it was not until 1657 that some semblance of continuity was achieved, so that the capital stock tended to become permanent, dividends were paid periodically, and a ready market existed for the sale of stock.

At the end of the 17th century, company promotion increased substantially and invaded other fields of enterprise. The Bank of England was formed in 1694, and other companies were formed for river improvement, for manufacturing and financial enterprises, and for utilities. However, the unrestricted growth of companies led to widespread fraud and dishonesty, and the early 18th century was marked by wild speculation in schemes of both fantastic and dishonest character. In September 1720 the inevitable crash came, and the strain proved too much for many joint stock companies. The immediate cause was the activities of the South Sea Company. It had been formed in 1711 to engage in trading in the South Seas, but it also had engaged in the funding of the national debt in return for monopolistic privileges. The bad repute of joint stock companies had led to the passage of the "Bubble Act" for the regulation of companies in the vain attempt to prevent the panic. The act declared that only companies formed by charter or by a private act of Parliament were legal. This provision hampered the development of the British corporation until the act was repealed in 1825 in response to strong financial pressures intensified by the rapid growth of the Industrial Revolution.

The experience of countries on the continent of Europe to some extent paralleled the character of English development. Holland, a leader in world trade in the 16th and 17th centuries, formed an amalgamation of a number of investors in the East India trade into the United East India Company in 1602. This company had a permanent joint stock from the beginning. Other countries, notably Prussia and France, formed trading companies in the 17th century, and France experienced a speculative craze and subsequent collapse in 1720 that paralleled British experience. However, it was only natural that England should take the lead in the development of business organization, as it was in that country that economic development was proceeding most rapidly.

The expansion of trade and commerce in both England and on the continent was accompanied by the growth of nationalism, and there was a close association between economic activities and political policies. The granting of special economic privileges by the sovereign authority over a trading area or in the production of a certain commodity characterized this period. The corporation was frequently the vehicle for granting these exclusive monopolistic privileges. Sometimes the sovereign participated in the promotion and financing and also the profits. The crown came to regard the corporation as a creature of the state. Under James I of England the view of the corporation as a separate legal person, distinct from its officers and created by the authority of the state, was first clearly laid down.

Late Modern Period

Up until almost the middle of the 19th century, business organization in England was predominantly personal: operated by one man, the family, or the partnership. The joint stock company flourished, but it was not the dominant form of business enterprise. With the Industrial Revolution at the end of the 18th century, the nature of manufacturing began undergoing a basic transformation.

The development of machinery in the spinning and weaving of cotton, and the harnessing of the machines to waterpower, led to production in the factory rather than in the English home. The steam engine introduced a revolutionary change in power. The size and capital requirements of manufacturing enterprises increased immensely, and business concerns increasingly faced financial, organizational, and legal problems that called for corresponding developments in business organization. In 1826 joint stock banks outside the London area were authorized. In 1844 a general law governing the formation of corporations made it unnecessary for each company to receive the specific approval of Parliament—a most complicated and expensive procedure. In 1855, Parliament granted corporations limited liability so that the private investor could not be held legally liable for the debts incurred by the company. By 1862 any group could form a corporation by filing with the state a memorandum of association giving the name, purpose, a list of the directors, and the nominal capital of the establishment. When the corporation started operations, "articles of association" had also to be filed. Thereafter it was required to file an annual statement, publish an annual report, and use the word "Limited" after its name.

On the continent of Europe the pattern of development in the direction of general incorporation and limited liability was somewhat similar. The Societe Anonyme, the French share corporation, took its form from the Code de Commerce of 1807. Until 1867 specific governmental authorization was required for its formation. Among the revisions of French corporate law of that year, however, was the provision abolishing individual governmental authorization and simply requiring that the notarized contract be deposited with a public registrar. Similar freedom of incorporation was achieved in Germany in 1870.

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