I. Introduction
A corporation is a common type of business organization in which its owners have the ability to use it as a separate, and distinct legal entity. One of the primary differences between a corporation and other types of business organizations, such as a sole proprietorship or general partnership, is that a duly formed corporation is, legally a person. Moreover, under the law, a corporation is a legal person who the owners, in essence, can control and direct to carry out a range of activities. To be sure, corporations are deemed to have a personality or personhood, including the ability to have some of the same legal rights, privileges, and responsibilities as a human being. The exact rights, privileges, and responsibilities that a corporation shares with humans has evolved over time. Currently, the rights and privileges that a corporation has as a result of its personality is the subject of an intense public and legal debate that will most likely not be resolved soon.
II. The History of the Corporation
The first corporations were founded during the Roman Empire. The term corporation is derived from the Latin word corpus, which loosely translates to mean “body” as in a body or group of people given the authority to act as one individual (Patterson, 1983). During those times, corporations were less associated with business and more commonly thought of as being an effective means to represent certain groups of people such as religious societies and social clubs (Patterson, 1983). While those early corporations eventually disappeared after the fall of the Roman Empire, the idea of an organization being a separate legal entity from its owner but with the ability to act as its owners saw fit, remained.
The modern form of the corporation as type of business organization took root in the 17th century. During the early 1600s, Spain and Portugal had obtained significant control over the large parts of the Americas and Asia. The fact that Spain and Portugal were able to extract tremendous amounts of resources from their control over these region, draw significant attention from other nations, including England. However, lacking state resources themselves to challenge the Spanish and Portuguese, these nations turned to private citizens to act on their behalf. For instance, in England, the monarchy would provide royal certification to private organizations that, in essence, would organize private missions to and compete in the name of England with Spain and Portugal in the Americas and Asia for control. A grant of certification meant that the organization could establish a trade monopoly on any region it could control. To ensure continued royal support, these organization would pay the state an ongoing fee. These organization would then organize missions, which included finding members to undertake the missions, or entering into contracts to secure ships, supplies and personnel. The missions were financed through the sale of stakes in the organization to outsiders for a share in the monopoly’s profits. Stakeholders were limited in their liability to the amount that they invested (Laksi, 1917). Organizational members, also contributed through the payment of a membership fee which guaranteed them a share of the monopoly’s profits as well. Since no one member or investor was burdened with the full cost of financing a mission, liability was limited to simply an investor’s investment or a member’s fee and/or to whatever extent they personally prepared for a mission, such as if they provided their own ship, or had their own crew for a ship.
This then is the birth of the modern corporation. It was a separate legal entity run by managers who were not the owners. It had the power to act on its own behalf. Indeed, the managers would take investments from outsiders and members’ fees to use it to hire and pay employees to work on behalf of the organization. Investors were only liable for the money that the provided to the organization. Moreover, the organization paid a fee (tax) to the state to maintain its authority.
The English form of the corporation arrived in the United States via British corporations that were granted monopolies to do business in the American colonies. After the Revolutionary War, many of those corporations were taken over and run by the Americans colonists. However, as with many other aspects of colonial British culture, over time the original English corporation evolved into a distinct American version.
III. Advantages and Disadvantages of Corporate Personality
The primary advantage of a corporation, as its history suggests, is its legal status as a person (Rogers, 2012). Having corporate personality means that it shares a number of legal rights with human beings. For example, a corporation can enter into contracts, own land, pay taxes, apply for and receive loans, and hire employees. Perhaps, the most important aspect of corporate personality from a business sense is, that it limits the liability of it owners (Twomey & Jennings, 2011). In other words, owners are not held accountable in most instances for the mistakes of the corporation. Indeed, the liability of a corporation’s owners extends only to the amount of capital that they invested into the company.
A second advantage of corporate personality is that it can extend in some cases between companies. For instance, a company with a subsidiary are two separate legal persons although one is owned by the other. Accordingly, the parent company is not liable to the debts or obligations of the subsidiary; and the subsidiary is not liable for the debts, obligations, or mistaken decisions of parent. In other words, it would be harder to sue individual directors and shareholders, although they are, in all likelihood the reason that the corporation has taken the harmful action in the first place.
While the advantages of corporate personality are clear, its disadvantages are less so. One key disadvantage is that it makes the company an easier target for legal action. For example, it is much easier for creditors and customers to sue a corporation even though the actions that the corporation makes are the result of the decisions of its managers and, in some instances, its owners.
Another disadvantage of corporate personality is that they can be prosecuted for criminal acts. For example, since a corporation has the right to hire an employee, it also has a responsibility to ensure that the employee follow all laws when acting on its behalf in the ordinary course of business. Therefore, if an employee commits a criminal act on behalf of the company, within their scope of authority and during the ordinary course of business, the corporation is as criminally liable as a human boss would be for the employee acting similarly (LaFave, 2000).
IV. The Corporate Personality Controversy
It is important to understand, however, the advantages of corporate personality for most of the history of the corporation was many focused on business advantages. That is, the reason why one would want to form a separate legal entity as a business is the advantages that provides in doing business, such as taking risks in investments without fear that you will suffer personally, or the stability that a corporation’s perpetual existence can provide to investors. There is little evidence, however, that the original idea behind the corporation as legal person was to give it all the same rights and privileges as human being. Indeed, while a corporation might be composed of human beings, no one would argue that it is literally capable of thinking or feeling.
Over the course of the nation’s history, corporations have consistently gained more and more of those same rights and privileges as human beings. The controversy surrounding corporate personality is centered upon the question of just how many right and privileges should be afforded to a corporation outside of its traditionally accepted rights, privileges and responsibilities associated with business and commerce.
The movement towards empowering corporate personality got its start from the 1886 Supreme Court case Santa Clara County v. Southern Pacific Railroad Company. The case was brought by the Santa Clara County against the Southern Pacific Railroad Company (SRRR) to recoups taxes that the SRRR refused to pay. The trial court ruled that the state could not enforce the tax because if was on fences installed by the SRRR, which actually improved the value of the land for the state (Santa Clara County v. Southern Pacific Railroad Company, 1886). The state appealed the decision. In finding for the SRRR, the Supreme Court held that the state was, in essence, legally attempting to double tax the SRRR, an action that not only was illegal according to its own state’s constitution but also was not imposed on any other individual or organization. While corporate personality was not actually mentioned in the decision, it was part of the oral argument made on behalf of the SRRR. Indeed, according to that argument, the SRRR suggested that the Fourteenth Amendment’s Equal Protection Clause applied to corporations as much as it did to human beings. That argument apparently found agreement on the Court as made clear in a headnote published on the case reporter detailing the case. That headnote states in essence that the Court believes that the Fourteenth Amendment did apply to corporations (Marx, 2010).
The effect of the decision and more importantly, the case reported heads note, was that, later courts interpreted the decision to mean was that the “any person” in the Fourteenth Amendment’s Equal Protection Clause statement of “no state shall deny any person within its jurisdiction the equal protection of the laws” included legal persons such as corporations. To be sure, in the years following the case, courts increasingly began finding that corporations had the same rights and privileges as human in a number of contexts such as in contract disputes and questions concerning the ownership of property.
In the 1970 case, First National Bank of Boston v. Bellotti, the Court largely relying on its decision in Santa Clara County, extended First Amendment Protections for corporations. In Bellotti, when a number of Massachusetts banks announced their plans to take out ads against an upcoming ballot initiative, the state informed them that they were prohibited from such actions unless it directly affected their “assets and holdings” (First National Bank of Boston v. Bellotti, 1970). In response, the banks sued claiming that the state regulation violated the constitutional rights. In agreeing with the banks, the Court held that the First Amendment protects a person’s right to legally influence the outcome of an election, such as through campaign ads. Accordingly, the Court went on to find, since corporations have been considered persons under the Constitution for nearly a century, there is no argument that the First Amendment also is available to corporations.
Interestingly, the greatest expansion of corporate personality rights has come within the last decade. Citizens United v. Federal Election Commission, which was decided in 2009, was the first major case in the new trend. The main issue in Citizens United was whether a corporation could make contributions to political ads of the candidates that the corporation supported (Citizens United v. Federal Election Commission, 2009). Following on the Court’s finding in Bellotti that corporations enjoy rights under the First Amendment, the Court reasoned that: financing political ads are a form of expressing a person’s right to express a political views, and therefore the government’s prohibition of such contributions was tantamount to an unconstitutional censoring of political speech. Accordingly, under Citizens United, corporations gained the right to make political contributions.
Two years after Citizens United, the Court seemed to retreat from its recent expansion of corporate personality rights when it handed down its decision in the case, Federal Communications Commission v. AT&T, Inc. The issue in that case was whether a corporation had a personal privacy interest in prohibiting the state from releasing information about it. In denying the corporation charge, the Court held that a corporation does not have a right of personal privacy, at least in regards to public records that have been given to the state (Federal Communications Commission v. AT&T, Inc, 2011).
In 2014, however, the Court return to its modern expansion of the rights that a corporation shares with humans. In the case, Burwell v. Hobby Lobby Stores, Inc., the issue was whether a law that allowed a corporation to deny its employees health coverage that included contraceptives based on the religious beliefs of the corporation’s owners. In finding the law constitutional, the Court held that although a corporation is a legally separate person from its owners, it nevertheless is made up of individual people (Burwell v. Hobby Lobby Stores, Inc., 2014). As a result, forcing a corporation to perform and act that is opposed by its owners’ religious beliefs is the same as personally violating the freedom of religions rights the owners have under the First Amendment.
Most recently, last year the Court decided to more case that can be interpreted as extending the rights of a corporation to include the Fourth and Fifth Amendments. In Los Angeles v. Patel, the question put before the Court was whether law enforcement authorities could demand access to and review hotel registries and guest sign-ins without anything more than telling the hotel that the review was for police investigations (Los Angeles v. Patel, 2015). In finding the actions illegal, the Court held police would need a warrant to access the hotel registries. The Court’s holding, in essence, says that hotel corporations, like people, have a Fourth Amendment right to be free of unreasonable search and seizures, at least in regards to their “papers and effects” such as hotel registries (LaFave et al., 2000). In Horne v. Department of Agriculture, the issue was whether a law could mandate that agricultural companies should reserve a portion of their crops for “government redistribution” (Horne v. Department of Agriculture, 2015). The Court found the law unconstitutional under the Fifth Amendment’s Taking Clause which requires the government to adequately reimburse private persons for the use or destruction of their property (Treanor, 1985). While the Court did not specifically state that a corporation was a person under the Fifth Amendment, the fact that the plaintiff in the case was a corporation suggests that indeed, corporations, like people should also be reimbursed under the Takings Clause.
V. Conclusion
That a corporation has personality is both historic and reasonable. Indeed, from a business point of view, corporate personality is essential in that it allows people to take financial risks that have limited liability. Considering the many developments in the history of the world that were brought about by corporations, the importance of corporate personality cannot be underestimated. However, while the importance of corporate personality is clear, whether that personality should be the same as a human under the law is less clear. Indeed, while giving a corporation the right to enter into contracts and own land makes sense, granting it the same right to free speech as a human seems less sensible considering the fact that a corporation is not a living, breathing natural person. However, as recent Supreme Court rulings suggest, the trend seems to be that corporate personality is increasingly becoming more human.
References
Burwell v. Hobby Lobby Stores, Inc., 134 S.Ct. 2751 (2014). Retrieved from http://www.supremecourt.gov/opinionms/13pdf/13-354_olp1.pdf
Citizens United v. Federal Elections Commission, 558 U.S. 310 (2010). Retrieved from https://supreme.justia.com/cases/federal/us/558/08-205/opinion.html
Federal Communications Commission v. AT&T, Inc., 562 U.S. 397 (2011). Retrieved from https://www.law.cornell.edu/supct/html/09-1279.ZS.html
First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978). Retrieved from https://supreme.justia.com/cases/federal/us/435/765/case.html
Horne v. Department of Agriculture, 133 S.Ct. 2053 (2013). Retrieved from https://www.law.cornell.edu/supremecourt/text/14-275
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Los Angeles v. Patel, 576 U.S. ___ (2015). Retrieved from https://epic.org/amicus/patel/Opinion.pdf
Marx, A. (2010, Feb. 04). Santa Clara vs Southern Pacific Railroad. The full story. Retrieved from https://www.dailykos.com/staory/2010/2/3/833414/-
Patterson, J. (1983). The development of the concept of corporation from the earliest Roman times to A.D. 476. The Accounting Historians Journal, 10(1), 87-98.
Rogers, S. 2012. Essentials of Business Law. San Diego: Bridgepoint Education, Inc.
Santa Clara County v. Southern Pacific Railroad Company, 118 U.S. 394 (1886). Retrieved from https://supreme.justia.com/cases/federal/us/118/394/case.html
Treanor, W.M. (1985). The Origins and Original Significance of the Just Compensation Clause of the Fifth Amendment. Retrieved on October 1, 2014, from http://scholarship.law.georgetown.edu/facpub/1051
Twomey, D., & Jennings, M. 2011. Business Law: Principles for Today’s Commercial Environment. Stamford: Cengage.
