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Understanding Corporations

Updated on September 7, 2009

The corporation is the dominant form of business organization in the free-market economies of the Western world. Thus it has become one of the most important institutions of modern times. In addition, the corporate form of organization has been widely employed for public purposes and in private activities of a nonprofit nature.

The association of human beings in pursuit of a common objective is as old as history. However, the corporation has evolved into a collective entity which is separate and distinct from the individuals who constitute it. Thus the modern corporation is a sophisticated concept that has only gradually developed.

Legally, the corporation is an artificial person. It can act and contract; sue and be sued; and manage and convey property. Although its individual members may change, the life of a corporation may be perpetual unless limited by its charter or voluntarily dissolved by its members. One of the most important characteristics of the corporation is that its members enjoy limited liability. The debts of the corporation are the debts of the separate legal "person" that is the corporation, and therefore the individual members are not legally responsible for them under ordinary circumstances.

It is generally held that the corporation derives its powers and privileges only through a grant from some sovereign authority. A classic expression of the sovereignty doctrine is the opinion of Chief Justice John Marshall in the Dartmouth College case in 1819: "A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the more important are immortality, and, if the expression may be allowed, individuality; properties by which a perpetual succession of many persons are considered as the same, and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand."

Reasons for Success

The large-scale corporation has become the dominant form of economic organization in Western industrial society for the following reasons:

  1. The corporation is generally the most practical form of business organization for the raising of capital. A concern must be built on a large scale to take advantage of technological developments and to compete successfully with other companies. To obtain the plant, equipment, and marketing outlets necessary for a large undertaking, an enterprise needs an amount of capital that may run into hundreds of millions of dollars— more than any individual or even groups of individuals could supply. Accordingly, an essential organizational requirement has been a form of enterprise that could amass vast amounts of capital from a large number of people. The system of share ownership of the corporation, in conjunction with the development of a capital market for the impersonal purchase and sale of stock, has led to corporations having assets in the billions of dollars and having hundreds of thousands of shareholders.
  2. The corporation provides continuity of organization   and   assets.   Typically   a   business concern with many millions of dollars invested in plant and equipment needs to  have an organization that is continuous  regardless  of  changes in stockholders or management. It would be in conceivable to have a form of organization that automatically terminated with the death of one owner or manager. Accordingly, the corporation with its limitless life-span, regardless of changes in the individuals who make it up, is almost necessarily  the  form, of business organization  required when great amounts of property are involved.
  3. The corporation provides an independent management. Large concerns typically have many stockholders who have invested their money be cause they could hope for profits without having to participate actively in the management of the company, it would be difficult indeed for several hundred thousand shareholders to engage actively in management. Accordingly, an essential characteristic of modern enterprise has been a growing separation between the shareholders, who are the owners, and the management, which is actively concerned with the operation of the enterprise.
  4. The corporation provides limited liability for the individual. The business concern would have found it impossible to amass capital from large numbers of people who had little further to do with the concern if such stockholders could be held liable for  the  debts of the enterprise. Accordingly,  limited liability of the stockholder has been an essential requirement for the growth of impersonal financing of enterprise.  (It should be noted, however, that  stockholders of banks and insurance companies do not enjoy limited liability).
  5. The corporation is an entity. The management of a company must be able to carry on its business not as a number of individuals but as an entity. The complex interdependence of an industrial capitalist society requires that the concern be considered as a separate entity with the power to enter into legal contracts, sue and be sued, and so on. The concept of the corporation as a legal person is essential.
  6. The corporation provides operational freedom to management. The management of a large concern must have a great deal of freedom and flexibility to operate if it is going to deal adequately with the many groups essential in making the complex  organization operate. The corporation, with its separation of stockholders from manager and its ability to act as an independent unit, provides this operational flexibility.

As a result of these advantages the corporation is the dominant form of business enterprise in industrial capitalist societies. Only in those fields of economic activity that operate typically on a small scale, such as in agriculture, do other forms of business organization predominate. In the United States, where the corporation is in an advanced stage of development, the large corporation with assets in the billions of dollars, hundreds of thousands of stockholders, and tens of thousands of employees has become the backbone of the economy.

A pattern of gigantic scale in the United States exists in manufacturing, transportation, banking, life insurance, and utilities. Developments of the same type on a somewhat smaller scale exist in the rest of the capitalist world. The corporation has become the organizing medium to hold together the complicated internal machinery and external relations that enable such gigantic business units to operate.

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