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Corporations

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From Wikipedia

Corporations

The six largest businesses of the world in 2005 by revenue in millions of dollars

A corporation is a legal entity separate from the shareholders and employees. In British tradition it is the term designating a body corporate, where it can be either a corporation sole (an office held by an individual natural person, which is a legal entity separate from that person) or a corporation aggregate (involving more persons). In American and, increasingly, international usage, the term denotes a body corporate formed to conduct business, and this meaning of corporation is discussed in the remaining part of this entry (the limited company in British usage).

Corporations exist as a product of corporate law, and their rules balance the interests of the management who operate the corporation; creditors who loan it goods, services or money; shareholders, typically in the secondary market, who hold shares related to the original investment of capital; the employees who contribute their labor; and the clients they serve. People work together in corporations to produce value and generate income. In modern times, corporations have become an increasingly dominant part of economic life. People rely increasingly on corporations for employment, their goods and services, economic growth and cultural development.

An important feature of corporation is limited liability. If a corporation fails, shareholders normally only stand to lose their investment (and possibly, in the unusual case where the shares are not fully paid up, any amount outstanding on them - and not even that in the case of a No liability company), and employees will lose their jobs, but neither will be further liable for debts that remain owing to the corporation's creditors unless they have separately varied this, e.g. with personal guarantees. This rule is called limited liability, and it is why the names of corporations in the UK end with "Ltd." (or some variant like "Inc." and "plc").

Despite limited liability shielding corporations from their full responsibility to society, corporations have many of the same rights recognized under the Constitution for the citizens of the United States. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they lose money into insolvency. Corporations can even be convicted of criminal offences, such as fraud and manslaughter. Five common characteristics of the modern corporation, according to Harvard University Professors Hansmann and Kraakman are:

  • delegated management, in other words, control of the company placed in the hands of a board of directors
  • limited liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares)
  • investor ownership, which Hansmann and Kraakman take to mean, ownership by shareholders. Hansmann and Kraakman are the exception to the rule and never explain why we should consider shareholders as owners.
  • separate legal personality of the corporation (the right to sue and be sued in its own name)
  • transferrable shares (usually on a listed exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris)

An important dispute relates to Hansmann and Kraaman's reference to shareholders as owners. Many legal scholars dispute shareholder ownership of the corporation. For example UCLA Law Professor Lynn Stout states that, "A lawyer would know that the shareholders do not, in fact, own the corporation. Rather, they own a type of corporate security commonly called “stock.”

Professor Stout continues to explain that,

“...stockholders do not have the right to exercise control over the corporation’s assets. The corporation’s board of director’s holds that right. Similarly, shareholders do not have any right to help themselves to the firm’s earnings; the only time they can receive any payment directly from the corporation’s coffers is when they receive a dividend, which occurs only when the directors decide to declare one. As a legal matter, shareholders accordingly enjoy neither direct control over the firm’s assets nor direct access to them.”

Shareholders neither own the corporation in any meaningful sense nor own, or have a privileged right to, the corporate profits. The value added by shareholders derives from the original investment for shares; however, the vast number of shareholders did not make this original investment in the corporation. These shareholders add no direct value in the widely-held corporation, but may add indirect value through providing a market secondary market for the original shares. Thus, shareholders should not be referred to, generally, as "investors," since they are in the secondary market. The lack of owner or investor status is why in most developed countries, excluding the English speaking world, corporate boards have representatives of both shareholders and employees to "codetermine".

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