A Brief History of the Corporate Form and Why it Matters


Take a brief moment to look around at your surroundings. Ask yourself, “how much of the ‘stuff’ in the room is directly or indirectly related to a corporation?” 150 years ago, the answer would have been very little. But today, there can be no doubt that corporations are intimately involved in all aspects of our lives. In light of that fact, it is appropriate to consider: (1) why we have corporations; (2) where they come from; and (3) how they will impact our future.

Part One: What Exactly is a Corporation?

A corporation is a legally distinct entity that has many of the rights attributed to individuals.[1] These rights include the ability to enter into contracts, take out loans, sue others, be sued, own assets, pay taxes, and so on.[2] A corporation is formed when individuals exchange consideration (usually in the form of cash) for shares of the corporation, which in turn creates a right to a portion of profits.[3] Generally, the losses incurred by a shareholder of a corporation are limited to the amount invested; this concept is known as limited liability.[4] Limited liability allows individuals to avoid personal liability for a business entity’s losses, thereby allowing risk-averse individuals to assume risks they otherwise would not have undertaken.[5] Corporations also allow individuals to pool resources to achieve goals that would be unattainable by a person acting in an individual capacity, and can last longer than an individual’s lifetime.[6] The benefits of the corporate form also create opportunities for abuse, which will be discussed below.

Part Two: The Development of the Corporate Form

The roots of the corporate form can be traced into antiquity.[7] Below, I will discuss important developments which have shaped the corporations we know today. I will begin with the emergence of limited liability.

Early Notions of Limited Liability: The corporate form emerged from economic arrangements that mirrored the concept of limited liability offered by modern corporations. One such arrangement was the commenda, a system developed in Eleventh Century Italy, wherein a ‘passive partner’ provided funding for a merchant vessel to be sailed by a ‘managing partner’ who invested no capital.[8] Upon completion of the voyage, the partners divided up the profits under a predetermined formula.[9] This arrangement allowed the passive partner to limit his or her liability of their investment, while the managing partner assumed the risks associated with the cargo and the voyage.[10] Soon, investors began pooling their funds to diminish the risk of losing their entire fortune on a single voyage.[11] In doing so, the investors realized the benefits of pairing limited liability with diversification.[12]

Development of ‘Joint-Stock’ Companies: In the 1600s, the British Crown began granting monopolies to groups of investors willing to undertake certain ventures.[13] These monopolies took the form of “joint-stock” companies that allowed labor and capital to be aggregated for the purpose of undertaking tasks that would be too large for any one person.[14] A famous example was that of the East India Company, in which investors pooled capital into a single “joint-stock” company from which profits would be distributed according to capital invested.[15] Only members of the East India Company had the privilege of conducting trade with India.[16] The East India Company eventually came to form a government over large portions of India and maintain a standing army. [17] Other notable “joint-stock” companies, such as the Virginia Company, helped expand British control of North America.[18] In fact, the Virginia Company established the General Assembly, which was the first legislature in North America.[19] These examples show that by allowing the aggregation of resources, corporations can be organized to carry out tasks too big for one person, or even one government.

Government-Chartered Corporations in the U.S.: Considering that America was literally settled by corporations,[20] their early popularity in the U.S. should not be surprising. In Alexander Hamilton’s second Report on Public Credit, he argued for a federally chartered national bank to help provide centralized direction for the financial sector.[21] The bank was established soon thereafter.[22] In his Report on Manufacturers, Hamilton argued for a comprehensive federally backed plan to expand public works, which was not immediately accepted.[23] In later years, however, the government would embrace its ability to direct industry through the creation of industrial corporations.[24] A famous example of this was the chartering of the Union Pacific Railroad, and other railroad companies, for the purpose of constructing the transcontinental railroad.[25]

Emergence of Truly Private Corporations: Throughout the 1800s, and particularly in the late 1800s, corporations began to shift away from the strict limitations of their legislature-approved charters.[26] This shift was illustrated in 1896 when New Jersey passed a statute allowing corporations to define the scope of their charters themselves, independent of the government.[27] Many of the benefits of the corporate form discussed above quickly came to be abused in the late 1800s.[28] For example, John D. Rockefeller’s Standard Oil Company came to control 90-95% of oil refineries in the U.S..[29] Journalists, such as Ida Tarbell, exposed the nefarious methods used by John D. Rockefeller to push out honest competitors.[30]

Federal Regulation of Privately-Owned Corporations: The government responded to harmful corporate behavior through the passage of the Sherman Antitrust Act, which sought to limit large corporations’ ability to fix prices and exclude competition.[31] Under the administration of Theodore Roosevelt, the Sherman Act was vigorously enforced through over 40 antitrust suits.[32] The most famous of these cases, Northern Securities Company v. United States, resulted in a 5-4 decision where the Supreme Court ordered the dissolution[33] of J.P. Morgan’s Northern Securities Trust.[34] Justice Harlan, writing for the Court, stated that “the court may make any order necessary to bring about the dissolution or suppression of an illegal combination that restrains interstate commerce.”[35]

For the Benefit of Shareholders: Traditionally, directors of corporations, governed by American law, must manage corporations primarily for the benefit of shareholders.[36] The effect of this principle is made clear in a famous case, Dodge v. Ford Motor, wherein Henry Ford decided to stop paying dividends “to employ still more men, to spread the benefits of this industrial system to the greatest possible number, [and]to help them build up their lives and their homes.”[37] The court held that the profits of a corporation cannot be withheld from stockholders for the benefit of the general public and that a dividend must be reinstated.[38]

Further Federal Regulation Following the Great Depression: The abuses of the corporate form, which caused the 1929 stock market crash, led to the passage of the Securities Exchange Act in 1934 under President Franklin Roosevelt.[39] The focus of this legislation was to promote transparency in the market for public securities by requiring disclosure of audited financial records and empowering the Securities and Exchange Commission to enforce compliance with the law’s objectives.[40]

State Regulation of Corporations: While federal regulation has had a significant impact on corporate law, the bulk of regulation occurs at the state level. State law largely defines the duties of corporate directors,[41] the shareholder voting process,[42] the procedures for amending bylaws and certificates,[43] and other areas central to proper corporate governance.[44]

Status as Individuals for Purposes of Free Speech: Under the law, the status of corporations as “individuals” has taken on new meaning in recent years. In Citizens United v. FEC, the Supreme Court held in a 5-4 decision that corporations have a political right to free speech under the First Amendment.[45] Under Citizens United, corporations’ right to free speech includes the right to “use money amassed from the economic marketplace to fund their speech.”[46] In effect, this gives corporations the ability to capitalize on their vast resources to engage in political speech protected under the First Amendment. This decision adds another dimension through which corporations have a great impact on our day-to-day lives.

Collectively, the events described above deliver three main takeaways: (1) historically, corporations have had a vast impact on our economic, political, and social relationships – a phenomenon that will likely continue into the future; (2) corporations have the beneficial capacity to facilitate large-scale, risk-intensive endeavors that would be impossible for individuals or governments to achieve alone, and (3) the opportunity for abuse of the corporate form may, in appropriate cases, call for government regulation to ensure that corporations serve legislatively-defined societal interests.

Part Three: Corporations and Public Benefit

The shape and evolution of the corporate form through the Colonial Era, the Industrial Revolution, the Great Depression, and Citizens United demonstrate how the government has expanded and limited corporate power to ensure that corporations are working for the benefit of society. This begs the question: where will be we 100 years from now? This is a very important question, especially considering the vast impact that corporations have on our lives.

Some states, including New York, allow companies to incorporate as “benefit corporations” (“B-corps”).[47] In New York, B-corps may be run for a specific public benefit, which may include but is not limited to, “‘(1) providing low-income or underserved individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment’ (BCL §1702(e)).”[48]

To become a B-corp in New York, a new corporation must define the specific benefit it aims to pursue within its certificate of incorporation.[49] Existing corporations can become B-corps through amendments to their certificates.[50]

The effects of laws like these are significant. B-corps do not have the same duties as other corporations to run the business exclusively for the profit of shareholders,[51] like Henry Ford was compelled to do. Instead, directors of B-corps can actively consider the interests of other stakeholders.[52] If Ford Motor Co. was defined as a B-corp in 1919, perhaps Henry Ford would have been allowed to provide for his workers and make cars more affordable for the general public, to the possible detriment of other shareholders. There will likely be court cases that decide that question in coming years. Today, well-known companies such as Patagonia, Eileen Fisher, Warby Parker, Method, Seventh Generation, Ben & Jerry’s, and Etsy are already designated as B-corps.[53]

The development of B-corps has coincided with a larger corporate trend of corporate social responsibility (“CSR”), which calls for companies to be held accountable to stakeholders in addition to their traditional duty to shareholders.[54] An apt example of a traditional corporation practicing CSR is Starbucks, which has made efforts to ethically source its coffee, sponsor community service endeavors, and reduce the environmental impact of its products, amongst other stakeholder-oriented initiatives.[55]

B-corps and traditional corporations practicing CSR present many questions that remain unanswered, including: (1) how will these operate in the era of Citizens United, (2) will consumers favor these companies over traditional shareholder-oriented companies, (3) what limitations do B-corps pose on businesses, (4) what are the legal obligations of B-corps to provide profit for shareholders versus benefits for stakeholders, and (5) will existing corporations voluntarily convert to B-corps? The answers to these questions will determine whether B-corps and trends involving CSR will have a significant societal impact in the future. Legislative bodies, at the federal, state, and local levels, will be called upon to resolve these intricate policy issues, with input from all stakeholders.

[1] Corporation, Investopedia, https://www.investopedia.com/terms/c/corporation.asp, (last visited Nov. 11, 2018).

[2] Id.

[3] Id.

[4] Id.

[5] Cf. Limited Liability, Investopedia, https://www.investopedia.com/terms/l/limitedliability.asp, (last visited Nov. 11, 2018) (discussing how limited liability “protects the partner’s personal assets from the risk of being seized to satisfy creditor claims in the event of the company’s or partnership’s insolvency…”).

[6] Cf. Williston, infra note 13, at 109 (discussing how joint-stock companies enabled individuals to pool their capital and labor to achieve results that would be difficult for one person to achieve).

[7] Robert W. Hillman, Limited Liability in Historical Perspective, 54 Wash. & Lee L. Rev. 613, 617 (1997) (discussing an arrangement in Ancient Rome called the peculium).

[8] See id. at 621-23.

[9] See id. at 623.

[10] See id.

[11] See id.at 623-24.

[12] See id.

[13] Samuel Williston, History of the Law of Business Corporations before 1800, 2 Harv. L. Rev. 105, 109 (1888).

[14] See id. (discussing how the structure of the East India Company was the result of a determination by Queen Elizabeth that it was easier to conduct trade with India when the efforts of “noblemen, gentlemen, shopkeepers, widows, orphans” are combined by “employ[ing]their capital in a joint stock,” rather than on an individual basis).

[15] Id.

[16] Id.

[17] Peter Marshall, The British Presence in India in the 18th Century, BBC (Feb. 17, 2011), http://www.bbc.co.uk/history/british/empire_seapower/east_india_01.shtml.

[18] Virginia Company, Encyclopaedia Britannica, https://www.britannica.com/topic/Virginia-Company, (last visited Nov. 11, 2018); see also Zephyr Teachout, How Corporations Became People, N.y. Times (Mar. 5, 2018), https://www.nytimes.com/2018/03/05/books/review/adam-winkler-we-the-corporations.html.

[19] Id.

[20] Id.

[21] Hamilton’s Economic Plan, Encyclopedia.com, https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/hamiltons-economic-plan, (last visited Nov. 11, 2018).

[22] Id.

[23] Id.

[24] Id.

[25] Union Pacific Railroad, Encyclopedia.com, https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/union-pacific, (last visited Nov. 11, 2018).

[26] See Harwell Wells, The Modernization of Corporation Law, 1920-1940, 11.3 U. Penn. L. Rev. 573, 581 (1888).

[27] Id. at 584.

[28] See Eduardo Porter, The Politics of Income Inequality, N.y. Times, (May 13, 2014), https://www.nytimes.com/2014/05/14/business/economy/the-politics-of-income-inequality.html.

[29] Standard Oil Company and Trust, Encyclopaedia Britannica, https://www.britannica.com/topic/Standard-Oil-Company-and-Trust, (last visited Nov. 11, 2018).

[30] Gilbert King, The Woman Who Took on the Tycoon, Smithsonian.com (Jul. 5, 2018), https://www.smithsonianmag.com/history/the-woman-who-took-on-the-tycoon-651396/.

[31] Sherman Antitrust Act, Encyclopaedia Britannica, https://www.britannica.com/event/Sherman-Antitrust-Act, (last visited Nov. 11, 2018).

[32] Trust-Busting, Encyclopedia.com, https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/trust-busting, (last visited Nov. 11, 2018).

[33] Northern Securities Co. v. United States, 193 U.S. 197, 317 (1904).

[34] Id. at 346.

[35] Id.

[36] See Dodge v. Ford Motor Co., 204 Mich. 459, 507 (1919) (“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”).

[37] Id. at 505.

[38] Id. at 507-10.

[39] Securities Exchange Act of 1934, Investopedia, https://www.investopedia.com/terms/s/seact1934.asp, (last visited Nov. 11, 2018).

[40] Id.

[41] Richard W. Jennings, The Role of the States in Corporate Regulation and Investor Protection, 23 L. and Contemp. Prob. 193, 200 (1958).

[42] Id. 202.

[43] Id.

[44] See id. at 202-205 (discussing various provisions of corporate governance which are governed by state law).

[45] Citizens United v. FEC, 558 U.S. 310, 343 (2010).

[46] Id. at 351.

[47] N.Y. State Dep’t of State, Formation of a Benefit Corporation, https://www.dos.ny.gov/corps/benefit_corporation_formation.html, (last visited Nov. 11, 2018).

[48] Id.

[49] Id.

[50] Id.

[51] Shoshanna Delventhal, Are Public Benefit Corps the Future of Business, Investopedia (Apr. 25, 2017, 4:32 PM) https://www.investopedia.com/news/are-public-benefit-corps-future-business/.

[52] Id.

[53] Mary Mazzoni, 3P Weekend: 12 B Corps Leading Their Industries, Triple Pundit (Dec. 9, 2016), https://www.triplepundit.com/2016/12/b-corps-leading-their-industries/.

[54] Corporate Social Responsibility, Investopedia, https://www.investopedia.com/terms/c/corp-social-responsibility.asp, (last visited Nov. 11, 2018).

[55] Id.


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Fordham Journal of Corporate & Financial Law