What Is a Corporation? (1949)

What is Does the Imperial Steel Company fit your mental picture of a corporation? It's big business. But do corporations have to be big business? Take Renneker's Incorporated, a drugstore. Corporations aren't always big, are they? And not all corp- are businesses. Consider, for example, Fairview Incorporated. A town is not a business, is it? What about schools and colleges? They are often corporations. As are many churches, hospitals, and other nonprofit organizations. But business makes up the great majority of corporations, whether they're small or large. Incorporation is one way of organizing a business. It is one form of business ownership. Imperial Steel Incorporated has many of the legal rights of a person. It owns the land and buildings and equipment. It can buy and sell property. It can borrow money. It can sue in court and be sued. It carries on a business. Imperial Steel, along with thousands of other legal persons, is a part of our daily living. It is a member of our society. Yet it is not simply this property, nor is it a human being. It is Imperial Steel Company Incorporated, with stock owned by people in widely scattered places. I set a high value on my stock in Imperial Steel. It pays good dividends. It's a sound investment. And now you advise me to sell it. What kind of a lawyer are you, Sid? Well, you'll have to raise the cash somehow. And I think the stock's the best way. Your books show clearly that the store is in no position to pay for all this new equipment and decorating. So, you and your partners are each personally liable for the whole amount. My partners. You know very well they haven't got anything more to put into this business. Just because I have this stock and a little property, I have to come to the rescue or we'll be sued. Just as I told you when this partnership was formed. Each partner is personally liable for any debt or commitment of the store. As a partner, you are legally bound by such contracts to the limit of your personal assets. Partnership. Why did I ever get into this? I was a lot better off in the days when I ran the business myself. Fairview Clothing Store. Walter Brown, proprietor. A good little business. All my own. I was a How do you say it legally? Single proprietor. That's it. I ran the store the way I wanted to. I could do as I pleased. And I collected all the profits. That's the way to run a business. On your own. A single proprietor. But you had difficulties in your one-man store. Your good location attracted business, more business than you could handle alone. Besides waiting on customers and receiving and stacking goods on the shelves, you had paper trouble, sales slips, bills, invoices. Man, did you need help? And suppose you got sick, where would your one-man business be? Not only the kind of help you can't hire, you needed additional capital to carry a larger variety of goods. I needed partners, you said. Now I'm on the spot because of partners. Walter, I still say a partnership was best for your kind of operation at that time. You remember, it was fairly simple once we found the right people, dependable men who had cash to invest and could do some of the work you needed. There was Baker. He had saved a little money while he worked 10 years as an accountant for a wholesale company. You knew you could trust Baker. He'd make a good partner. He'd invest his cash and work as an accountant for a share of the profits. And then there was Johnson. He could also invest a little money. And his experience as a clothing buyer for another company made him a valuable partner, too. We knew they'd work hard for the business because each had a personal interest in making it go, as well as the ability to do the work that had to be done. So you were partners in the Fairview Clothing Store. And with their cash and their help, you were able to expand a little, take on some additional lines of goods. Yes, I think your partnership has done quite well. I suppose so. At least we did well until Johnson made the deal for those expensive modern fixtures and new storefront and sign commitments for more than our ready cash, he was just talking to more than we can handle right now. We'd like to modernize the store like that, but where is the money coming from? Johnson signed the contract, I have to pay for it. Even though I'm the biggest investor in the store, I can't cancel the contract for all that custom-made equipment. It's just lucky for this whole partnership that I can scrape up a little more money to invest in this store, but I don't want this to happen again. What can I do? Can I get rid of my partners? Own the store myself again? You can't afford to buy them out now, can you? No. And I don't know that I want to with that. The store needs all three of us. Everybody makes a mistake once in a while, but I just can't be personally responsible for another one. That's one of the weaknesses of a partnership, isn't it, Sid? Well, maybe you better incorporate the store. Incorporate? Yes. Issue stock to each partner in proportion to the amount of his investment in the store. With more than half the stock, you would have a controlling interest, voting control of the corporation which owned the store. You'd share your profits with the others in proportion to their stock ownership. Wait a minute. Issue stock, controlling interest. That sounds like a lot of paperwork. Or red tape. Oh, it does get a little complicated, and you may as well know there are other disadvantages. You'd be paying special taxes. You'd be subject to new regulations, but incorporating would give you the big advantage of what you want right now, limited liability. Look, here's how it works. You start with a group of people who want to invest their money in a company. Then these people apply for a charter as a corporation. The state government issues a charter to that corporation. Now that corporation operates legally as an individual person. It is not a group of people. It is under the law a legal entity. Or the same as one person engaged in business. And that person is responsible for the debts and Look here a moment. Here is the Fairview Clothing Store as it is now with the three of you as partners. Suppose you all agree to dissolve the partnership and incorporate. The stockholders will elect a board of directors. In this case, as large a stockholder, you can select a board of directors yourself and your partners. Who will vote to make you president of the corporation. It all sounds complicated. But if you say it's necessary and it will let me, the corporation, what to do, I'm in favor of it. And it will mean that none of the stockholders can be held liable for any more than his original investments. Sure. That's what we mean by limited liability. Well then, I think it's a good idea. I do, too. As a matter of fact, I was thinking I'd like to put some money into Fairview Clothing Store Incorporated. Looks like a good investment to me. Maybe you'd like to invest enough to pay for this equipment and decorating? Well, uh the amount involved would still leave you with a controlling interest. I'll do it. Let's see if we can get your partners to agree to incorporate. Maybe I can hang on to my stock in Imperial Steel Incorporated. Yes, Mr. Brown will remain one of the many owners of Imperial Steel Company, Incorporated. Because the stock of this company is offered on a stock exchange to the general public, it is known as an open corporation. Like many large open corporations, Imperial Steel is not controlled by any one person. Stock shares are bought and sold as large and small investments of many people. The management of the company is handled for the stockholders by the elected Board of Directors. Thus, by the pooling of capital at limited risk to the individual owners, corporations can make re-contribution to clothing in our economic life.