Corporations In General
( Originally Published 1918 )
Advantages.—The growth of business within the past years has been such that its prosecution and development have called for the use of capital to an extent far beyond the purse of any individual. This called for either the partnership or the corporation, that the combined resources of a number of men might be enlisted to carry on the desired projects.
The partnership was the easier, more informal method of association, but with its recognized drawbacks, chief of which were the liability of each partner for the debts of the entire enterprise and the legal effect of the death of any one of the partners working an automatic dissolution, leaving the survivors as trustees for the settlement of the partnership interests and the rights of the representatives of the deceased.
On the other hand, the corporation was the more formal method of association, with the distinct advantages of (1) duration for a specified number of years or perpetually, according to the laws of the state of its incorporation; (2) limitation of liability of its stockholders; (3) not being affected by the death of any stockholder; (4) the right to transfer of individual interests by the sale of one's stock; (5) the right to deal and con-tract with its own stockholders and, under certain conditions, with its own officers and directors; (6) its more effective management by a board of directors and officers chosen by the body of the stockholders, and (7) the greater ease of attracting capital for the prosecution of its business.
Duration.—Unlike a partnership, a corporation continues to exist for the full period of its fixed life as specified in its charter. This may be for any given term of years not exceeding, however, the limit prescribed in the statutes of the state in which it is incorporated. Even in states where a limit is fixed, the corporate existence can be continued under provisions therefor in such laws. Death, insolvency, insanity, disagreements between members cannot disturb the life of the corporation, while under the partnership form of doing business, any one of these would be termination of its existence. The corporation can only cease to exist (1) by expiration of its chartered term; (2) by a voluntary dissolution, usually on unanimous consent of its stockholders; (3) its in-solvency or (4) by the forfeiture of its charter by the state.
Limitation of Liability.—Under the corporate form of doing business, the liability of the individual stockholders may be said to end with the full payment for the stock held, or of stock subscriptions made by them. This liability is first to the corporation itself, and indirectly to the creditors of the corporation to the extent of any such unpaid portion. But when stock is fully paid for, it is almost without exception, the rule that there is no liability attaching to the stock-holders for the debts of the corporation. In the case of banking corporations another rule applies, as there is practically a uniform liability on the part of the stockholders to an amount equal to the par value of their stock in the case of the insolvency of the institution. This provision is made for the express purpose of giving added security to the depositors, either in case of the failure of the bank or any impairment of its capital. In a few states there is a liability on the part of the stockholders for debts due employees. The stockholder owning full paid stock may, in the case of corporate disaster, see his investment swept away, but his loss is limited to the extent of his stock holdings.
Transfer of Interest.—In the corporation the interests of the owners are represented by shares of aliquot parts of the whole, and such ownership is evidenced by certificates of such shares, issued by and in the name of the corporation, and under its seal and the signature of the duly appointed officers. These certificates are readily transfer-able by endorsement in the case of sale or gift, to the new owner, who may, upon surrender of the endorsed certificate or certificates, have new ones issued direct to him by the corporation.
In the case of the partnership, where the right of selection of the individuals composing it is zealously guarded, no partner may transfer his interest without the consent of the others, nor any part of his interest. But with the corporation, the certificate of stock is like any other property that one may sell or dispose of at will.
Right of Contract.—The corporation is vested by law with a distinct individual existence of its own, and thus becomes endowed with the right to sue and the liability to be sued the same as a natural person. The corporation may contract in its own name the same as an individual. Its stock-holders and officers may even contract with it, but their acts must not be to the prejudice of the corporation, although they may be profitable to the stockholder or officer. It follows that such stockholders and officers may sue to enforce their contracts with the corporation, while in the case of a partnership, a member may not contract with it or sue it, even to enforce his personal obligations.
Conduct of Business.—No more efficient manner of handling the affairs of business has ever been developed than that of the administration of the activities of the corporations. The scope of its business is set forth in its charter and in it and in its by-laws are to be found the details of its own organization for the conduct of its business. Its stockholders elect the directors into whose hands all of its interests are committed, and they in turn select the officers through whom it shall function. In the conduct of its affairs it may go outside of its stockholders to secure the best services obtainable for its business, and many officers are not required to be either directors or even stockholders.
It is the province of the stockholders to make all necessary provisions in the by-laws for every check and safeguard, and to so organize each department that it shall operate to its fullest efficiency. This requires great care and skill in the formation of the organization and in the drafting of the by-laws, so that all needed latitude may be given the officers and yet all prudent checks thrown around their authority. To this end the board of directors must direct and not be a dummy board. Such is its duty, and it has been found that safety and -success follow where frequent board conferences are held and at stated times all matters of importance pertaining to the business-of the corporation are brought up, discussed and decided. Watchfulness is just as important in corporate affairs as in one's own individual matters.
Interesting Capital.--Without the protection afforded by the corporate form of business organization, capital would be wary in the matter of investing. Capital insists that the hazards be limited to those of the business itself, and not subject to the misfortunes of any of those connected with the enterprise. In the corporation the investor knows and can limit his risk and at the same time is able to judge of the probability of success without having to figure whether any of the others associated in the undertaking may or may not become personally involved in other transactions and so in turn involve his own in-vestment.
Capital wants to know that its interest may be sold and transferred without the necessity of gaining the consent of any other person, and without formality. It wants to know that its investment is the limit of its liability and that according to such investment may be its voice in the management of the concern.
Corporations for Small Business.—It should not be assumed that the corporate form of doing business is for the great enterprises only, those who must needs gather together vast sums of money. It is just as valuable for the small business. In fact it is even more important for the two or three men of limited means, who would pool their entire resources, that they safeguard their all by the protection that incorporation affords. With them there is even a greater danger that personal disaster may overtake one of them, and in turn, engulf the enterprise and make their joint endeavor liable for the debts of one of their number. In the matter of inducing others to come in and join small enterprises, the corporate form is by all means preferable and more attractive.