TheHistory and Purpose of the Modern Corporation
Acorporation can either be a sole proprietorship, partnership, LimitedLiability Company or a private company. A corporation is alsoreferred to as acompanyor a limited company.Inthe1870s,individualsor group of people ran most businesses in America.Therewas a lot of revolution in America around the 19thcentury,fromthe time of civil war to the present,concerningthe way people manage and run their businesses.Outof the various forms of business entities such as soleproprietorships and partnerships, the company always stood out due toits various advantages over the other two forms of businesses [ CITATION Mar04 p 392 l 1033 ].
Corporations became America’s economic key institutions that contributed in therapid development of the country (Coase 398).Though,it was observed as dangerous and only legitimate in specificbusinesses, it brought some changes and benefit to the country as awhole.Thereare different reasons that led to the formation of corporations,whichbrought about several advantages,disadvantages,andimpact on the democratic society of United States of America.While corporations have a limited liability characteristic thatexpose the shareholders and other investors to financial riskassociated with the loss of their investment and in case acorporation is unable to pay its debts, the shareholders cannot becalled upon to pay the debts because the corporation is considered tobe a separate legal person from its owners and renders the ownersimmunity against any wrongdoings, both illegal and criminal acts,Corporations are beneficial and extremely relevant in the modern daybusiness environment and for economic development because It iseasier for a corporation to raise capital compared to the other formsof business entities through the issue of share capital as well asaccess debt capital from the borrowing institutions since they haveassets that can be used as loan collateral , in addition to the rightto transfer shares freely therefore shareholders can easily disposethe shares in a corporation at any time depending on the marketconditions, and most importantly the limited liability clause in thatthe shareholders or owners of the business are not legallyresponsible for the debts of a corporation. .
TheEmergence and History
Theemergence and history of Modern Corporation datesback to 200 years. The Dutch East India Company (VOC) is consideredto be the first modern corporation. Its charter,VereenigdeOost-Indische Compagnie datesback to 1602. However, the charter did not include all the legalpersonality features of a corporation [CITATION Gil01 p 329-357 l 1033 ].TheBritish East India Company (EIC) and Dutch East India Company (VOC)contributed significantly to the growth of the modern corporations.
Inthe 1870s, venture capitalists or some financial institutionsfinanced many businesses such as sole proprietors or partnerships.Since during this era there were no big venture capitalists or largefinancial institutions such as banks that issue ready capital,prosperitywas only for the lucky few who were born into wealthy families.Also,ifdebtors were unable to pay a debt,itwas transferable to the other family members or relatives.Toadd on in worse case scenarios, it led to the incarceration ofrelatives or family members,onbehalf of the accused individual who failed to pay the debt.
Inthe mid 19th century, venture capitalists and financial institutionsfeared to invest in various businesses because the shares of thebusinesses were not transferable to the public since there werestrict rules once a person joined, regardless of whether the companywas poorly performing and the investor would prefer to invest inother profitable or high prospect businesses.However,inthe last years of the19th century there were major transformations onthe operations and structures of businesses in America.Therewas the need for businesses that the owners and the business were twoseparate entities, thereby the members or management was not liablefor the debts of the business.This moved encouraged numerous financiers to delve into investing inthese corporations since they knew their investment was to a largeextent secure.
Variousreasons led to the emergence of modern corporations. To begin with,Modern Corporations were introduced to solve the problem of havingthe same people owning and managing the businesses. Early businessesonly employed a few people, but the owners themselves were in chargeof overseeing all the operations of the business. However,theformation of Modern Corporation led to business management done byqualified professional [ CITATION Wil81 p 1546 l 1033 ].
Theneed for honesty in a distant branch created the necessity for ModernCorporations.However,asbig business continued to grow there was aneedfor the use of bureaucratic hierarchiessince thesuccess of the business relied on a centralized coordination.Tobe able to achieve these big businesses formed formal administrativebusiness structures.Therewas the establishment of different managerial levels.Therewas also the creation of understandably outlined authorities.Therewas formal use of rules to assist in the governance of thecorporation operations.Thesehelped in the creation of“middleclass”levelfor corporation’swhite-collaremployees,thiswas different from the tradition middle-classlevel that involved independent professionals,farmers,andshopkeepers [CITATION Wil81 p 1537-1568 l 1033 ].
Mostof the earlierbusinesstransactions were done within one locality for example a town,andfrom a single factory or office.Therefore,townresidents were their main customers.However,therewas theneedfor growth of businesses to other localities hence the formation ofnew corporation business in geographical scale and size.Thismeant that their transactions were scattered widely indifferentlocations.
Mostof the early businesses specialized in a single kind of businessoperations for example if someone was a merchant,manufactureror wholesaler they would only handle that particular field or productthat they have.However,withthe introduction of the Modern Corporation businesses were involvedin several kinds of business operations.Forexample,theoperations of a USA steel company was mining from the ground theirown ore,thentake it to its mill,processit to steel,thento any desired finished product,andthen transport the finished products to wholesalers
Advantagesand Disadvantages of Modern Corporations
Corporationshave both strengths and weaknesses acorporationis reflected to be a legal person separate from its founders. In thecase of Salomonv Salomon and Company Limited,the House of Lords argued that a corporation is a different beingfrom its owners or subscribers to the memorandum [CITATION Ber91 p 187 l 1033 ].
Oneof the advantages of using a corporation to your business is that itis limited liability.Thatis the shareholders or owners of the business are not legallyresponsible for the debts of a corporation.Ifthe corporation is incapable of paying its creditors,thecreditors have no right to demand payment from the owners orshareholders.TheGlobal Financial Crisis in 2008-2009, for example, had severe effectson the liquidity position of most companies. The financial crisis ledto the liquidation of some ASX listed companies such as HolmanBrothers Limited. The owners of such companies wouldn’t be liablefor the debts and losses [ CITATION Nia12 p 274 l 1033 ].
Thecorporation’s properties belong to the company and not to theindividual shareholders. In the case of Macaurav Northern Assurance Co,an individual doesn’t have the right to insure the company propertyor make drawings from it.Acorporation has the right to transfer shares freely unless restrictedby the company’s articles [CITATION Gra03 p 923-934 l 1033 ].Ashareholder can easily dispose the shares in a corporation at anytime depending on the market conditions. A corporation has perpetualexistence,inother words, a legal entity that is separate from its owners andshareholders.Therefore,inthecaseof death or changes in the ownership of the corporation,thisdoes not affect the corporation as it has the legal right to continueas a business.
Itis easier for a corporation to raise capital compared to the otherforms of business entities through the issue of share capital.Corporations can easily access debt capital from the borrowinginstitutions since they have assets that can be used as loancollateral [ CITATION RHC37 p 392 l 1033 ].However, over-reliance on debt capital can expose the corporations toliquidity problems. Also, corporations can be used as exceptionalasset security vehicles. By leveraging the authorized acts, you canstructure your assets within these permitted tools so that you canexploit the security presented through corporations. In addition,operating a business as a corporation indicates that the corporate ispractical this is attractive to investors and creditors. Moreover,corporations can set fiscal year end dates which allow one to choosetheir tax year ends. This elasticity provide opportunity forcommercial management prospects where you can save money on taxes bymoving the earnings between entities from one tax year to another anduse your corporation to make your money work well for you.
Corporations have one majordisadvantage in terms of their limited liability characteristics thatexposethe shareholders and other investors to financial risk associatedwith the loss of their investment. In case a corporation is unable topay its debts, the shareholders cannot be called upon to pay thedebts because the corporation is considered to be a separate legalperson from its owners. However, the investments made by theshareholders will be lost if the corporation is liquidated. Acorporation is considered to be an “invisible friend” capable ofowning property. The legal status of a corporation renders the ownersimmunity against any wrongdoings, both illegal and criminal acts.Corporations lead to the creation of “legally irresponsibleprofit-maximizers” (Grant 927). The owners have no concern on howthe corporation generates profits.
Theright to transfer shares freely can be abused by persons intending totake over the corporation. Theshareholders may threaten the corporation with a forced take over toa competitor corporation through transfer of shares to thecompetitor.
Agencytheory is a main disadvantage of corporations.Public companies practice stewardship accounting. In stewardshipaccounting, the shareholders provide resources to an organization.The management of the public company should invest in projects thatare going to maximize on shareholders’ wealth. The separation ofownership and management may create conflict between the shareholdersand the management. The management may undertake unprofitableinvestments. The management may also indulge in fraudulent practicessuch as altering the financial statements to conceal errors andfrauds.
EnronCorporation, for example, was the sixth largest energy company in theworld. However, the company collapsed as a result of fraudulentactivities by the top executives. The corporation’s earnings hadbeen overstated. The top executive disposed their investments inEnron before its downfall. Most of the top executives were jailedafter the investigations [ CITATION Mar02 p 4 l 1033 ].
The corporate form of business hadvarious impacts to the democratic society.A democratic society aims at ensuring equal rights, freedom of speechand tolerance views of the minorities. The emergence of corporationscan be engines of positive change or negative change in thedemocratic society. The effect can be on general populations throughadvertising in the mainstream media, on public policy and governmentand international institutions. Corporations have major influences onour lives. Out of the 100 largest economies, for example, 51 arecorporations and 49 are countries [ CITATION Anu02 l 1033 ].
Theemergence of corporations has led to the “corporate libertarianism”where the rights and freedoms of the corporations were above those ofindividuals. Corporations are prone to evildoing to the democraticsociety. The cases of McDonald, AH Robins, and British AmericanTobacco explains some of the evils committed against the democraticsociety. Corporations promote criminal behavior amongst thedemocratic society. As discussed, the corporate owners will indulgein any activity at the expense of human life so as to make profit.The corporation can be viewed as a source of evil. In most cases, thelaw provides for penalizing the offenders without criminalizing them.The wealth owners of the corporations hide behind the corporate veil.
Thecorporate form has led to wealth-owners having a strong influence inthe state affairs regardless of their impacts on the ordinary citizen[CITATION HJG02 p 90 l 1033 ].Thecorporate form has had an impact on the cultural, physical andpolitical environments across the globe. Thecorporations have claimed the individuals` human right of freespeech.Before the 1886 ruling, corporations were not allowed to give moneyto either the politicians or political parties. The corporationscouldn’t influence elections.
However,after the ruling, corporations took control of the political partiesand financed politicians. Corporations have more rights than people.The increasing size and wealth of the corporations have a significantinfluence on the economic and political power denying the humanpersons the privilege they had before. In most cases, the ordinarycitizens normally enjoy the economic policies that are favored by thecorporations [ CITATION Kay57 p 316 l 1033 ].Thereforecorporations are bad because their legal protections, politicalinfluence and wealth accretion have exceeded those availableto citizens. Also, the corporations have grabbed citizens’ contractwith their nominated legislatures so the government mainly serve theinterests of the corporate rather than those of the people.
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