Definition.—The definition of a corporation, given by former Chief Justice Marshall as “an artificial being, invisible, intangible, and existing only in contemplation of the law,” sets forth its fundamental characteristics, viz., artificial personality and creation by the law. Blackstone says, “A corporation is an artificial person created for preserving in perpetual succession certain rights which being conferred on natural persons only would fail in the process of time.” Blackstone’s definition lays particular emphasis on a characteristic not specifically mentioned by Marshall, that of perpetuity of succession. It is apparent that the corporation within the limits prescribed by statute has most of the attributes and powers of a person—it can sue and be sued, can hold and pass title to property, real and personal, can carry on business in its own name, is responsible to the extent of its entire property for the payment of its debts, etc.
Growth of the Corporate Form of Organization.—The corporate form of organization is being increasingly utilized for the conduct of business of almost every kind. It offers a much more attractive field to the investor who desires to place his surplus funds in productive enterprises and share in their profits without having the burdens of active management or the risk of losing his private fortune to satisfy the claims of business creditors should the undertaking prove unsuccessful. Just as the partnership is an advance over the sole proprietorship in point of business organization, efficiency, and ability to cope with larger undertakings, so the corporation in some of its forms represents an advance over the partnership form of business organization. Its advantages and disadvantages in comparison with the partnership will be reviewed briefly.
Advantages.—Some of its advantages are:
1. Limited liability. Only corporation property can be levied on to satisfy the claims of creditors; the private fortunes of the individual stockholders cannot be touched.
2. Continued existence. The death, withdrawal, or bankruptcy of any of its members does not interfere with its existence. Its life may be terminated by voluntary dissolution, insolvency, expiration of charter life, forfeiture of charter to the state for misuse, non-use, or abuse of its privileges.
3. Transferability of its shares, and their use as collateral for private loans without injury to the credit of the corporation.
4. Larger capital. A partnership becomes unwieldy and inefficient if the number of partners becomes too large. The number of stockholders in a corporation is not limited and varies from one to many thousands in the larger corporations. Accordingly much more extensive fields of endeavor are open to the corporation because it can bring together and use advantageously the combined capitals of many persons.
5. Centralized control. Its method of internal organization is such that one man can be made the responsible head instead of the many heads of the partnership.
Disadvantages.—The chief disadvantages of the corporation may be summarized thus:
1. Comparative absence of personal interest of the managing officer. This is largely a theoretical drawback, inasmuch as it is usually required that the managing officer be a stockholder.
2. As a creature of the state, the corporation is subject to state legislative control. It is taxable by the state and is required to make periodic reports.
3. Its credit is dependent on the amount of its net assets and not on the fortunes of its individual owners.
4. Corporations are sometimes restricted as to the character of their business. In some states certain lines of business cannot be carried on by corporations.
5. In some states it is illegal for corporations to hold stock in other corporations.
In spite of these and other disadvantages, most of which are not serious, the advantages of the corporate form of organization far surpass those of the sole proprietorship or partnership.
The Formation of a Corporation.—Formerly a corporation could be brought into existence only by a special act of the legislature. As this method proved cumbersome and was subject to much abuse, it gave place in all states to general corporation statutes or enabling acts whereby an application in due form and according to statutory provisions is all that is necessary for organizing a corporation. Though the statutes differ for each state, they are uniform in the main points. The method of formation under the New York statute will be explained.
Certificate of Incorporation—New York State.—The form of application for a charter to do business as a corporation is known as a “certificate of incorporation.” This document must be prepared by at least three natural persons, two-thirds of which number must be citizens of the United States and at least one of whom must be a citizen of New York State. These persons are called the “incorporators.” Their certificate must be made out in the English language, signed by each incorporator, acknowledged before a notary public, and must contain:
1. The name of the corporation, in the English language. This must be different from the name of any other domestic or foreign corporation doing business in the state and must not contain in its title the words, “bank, trust, insurance, etc.”
2. The purpose or purposes for which it is created. There is practically no limitation as to the lines of endeavor the corporation may declare itself desirous of following, with the exception that banks, trust, transportation, and insurance companies, etc., come under special laws.
3. The amount of capital stock of the corporation, common and preferred if both are to be issued. Preferred stock of various classes may be authorized after incorporation. The minimum amount of capital required by the New York law is $500. One-half of the capital must be paid in within one year from the date of incorporation. The certificate must state also the amount of capital to be paid in before the corporation can commence business and this must not be less than $500. No debts can be contracted before that amount is paid in.
4. The number of shares into which the authorized capital is divided and the par value of each. This must not be less than $5 nor more than $100, although more recently capital stock has been authorized with no named par value.
5. The place in which the principal office is to be located, which must be within the state.
6. The contemplated duration of its life. This may be made perpetual.
7. The number of directors, which must not be less than three.
8. The names and post-office addresses of the directors for the first year. Directors usually are stockholders and at least one-fourth of the directors are subject to election annually.
9. The names and post-office addresses of the subscribers to the certificate of incorporation, and the number of shares in the corporation subscribed by each.
Filing the Certificate—New York State.—The certificate of incorporation is usually made out in triplicate. The original must be filed and recorded in the office of the Secretary of State; the duplicate certified by the Secretary must be filed with the clerk of the county in which the principal business office is to be located; and the certified triplicate is retained by the corporation in its own files. The fees for filing the certificate with the Secretary of State are $10, and for recording 15 cents per folio. The county clerk’s fees are 6 cents per folio for filing.
Organization Tax—New York State.—Before the filing of the certificate, an organization tax of 1/20th of 1% of the authorized capital stock must be paid to the State Treasurer. Record of this payment is forwarded to the Secretary’s office.
Initial Acts of Corporation.—When the corporation is ready to commence business, its first act is usually to call a meeting of the incorporators and directors for the purpose of adopting a set of by-laws—although this matter may be delegated to the board of directors. This meeting also authorizes the issue of stock at or above par in exchange for cash, labor, or property.
State Control.—The outside control of the corporation is vested in the state. The state constitution, the general corporation law, the statutes relating to business organizations in general, and the specific contract between the corporation and state embodied in its charter or certificate of incorporation—these form the basis for state control and the limits within which the corporation may act as an authorized person. If the corporation does an interstate business, it is subject also to the regulations of the Interstate Commerce Commission.
Working Organization and Management.—The corporation’s owners, that is, the stockholders, are the source of all authority and control. Unlike the partnership where control and voice in the management are equally shared by the partners regardless of any inequality in their investments, the corporation ownership is evidenced by shares of stock and each share is given one vote. Thus each owner’s authority and voting power are dependent upon the amount of his ownership of stock. He has, however, the right to delegate this power to another person by “power of attorney,” and in this way it frequently happens that one stockholder exercises a power far beyond the amount of shares owned by him. Delegation of voting power frequently occurs when the stock is widely distributed geographically and is owned in small lots. In theory the agent or attorney entrusted with the voting power of others is simply carrying out the will of his principal, the real owner of the stock.
Annual Election of Directors.—Because of the number of stockholders and because many of them are engaged in other pursuits, one of the characteristics of the corporate form of management is that the owners frequently do not have direct control of their enterprise. Accordingly, at regular times, usually annually, the stockholders elect directors to whom are delegated the general oversight and control of the business. The board of directors thus elected stands in the place of the stockholders during the period between the annual meetings at which it renders account of its management.
Officers.—The board of directors elects officers of the company—usually a president, vice-president, treasurer, and secretary—to undertake the active management of the business; or the directors may appoint a general manager or superintendent on whom rests the active management and who is the executive head of the corporation. Thus the chief characteristic of the working organization of the corporation is the delegation of authority to a responsible head. The accountability of the officers to the board of directors, and of the directors to the stockholders, has so far proved the most efficient method of conducting modern business.
The Showing of Proprietorship.—The chief difference, from an accounting viewpoint, between the corporate form and other forms of business organization is in the showing of proprietorship. Vested proprietorship in a sole owner or partnership business is carried under the title of the different owners’ capital accounts, and credit is extended by the public to such owners, not on the basis of what the particular business is worth, but on the reputation of the owners and what they are known to be worth outside the business as well as in the business. On the other hand, the law has relieved the owners of a corporation of individual liability for the debts of the corporation. Only the corporate property can be held liable for the satisfaction of creditors’ claims. For their protection, the corporation is not allowed to impair its capital stock by the payment of any portion of it in dividends to the owners or to change the amount of its capital stock without special authority. The outstanding capital stock, in theory, represents to the prospective creditor the minimum value of the corporation assets which are supposed to be sufficient to meet in full the claims of creditors. Accordingly, the portion of the capital of a corporation represented by its capital stock is a fixed amount, and the increments or decrements of proprietorship are usually shown in a separate account called Surplus. This account must always be read with the Capital Stock account to ascertain the current or present capital as distinguished from the original.
The Surplus account is sometimes divided and shown under such titles as Profits, Reserves, Undivided Profits, Working Capital, etc. To ascertain full proprietorship or net worth, all such accounts must be included.
Records Peculiar to a Corporation
The Subscription Book and Subscription Ledger.—Upon the proper filing and acceptance of the certificate of incorporation, authority is given the incorporators to secure subscriptions to the capital stock. Subscription books or blanks may then be opened, which usually contain a form of agreement somewhat as follows:
We, the undersigned, do hereby subscribe for and agree to take the number of shares of the capital stock of the Blank Company, par value ........ set opposite our names and pay for the same, ........ per centum down, the remainder subject to the call of the board of directors.
Where the number of subscribers is large and especially if record must be made of the payment of calls, a Subscription Ledger or Instalment Book is used. This ledger has no set form but usually carries columns showing when the calls are to be made, when actually made, when paid, and the balance still due. A controlling account called “Subscribers” or “Subscription” is carried on the general ledger, with a special column in the cash book to gather the totals for posting.
The Stock Certificate Book and Stock Ledger.—A subscriber is, as such, a stockholder in the corporation even though his stock certificate may not yet have been issued to him. The stock certificate is merely evidence of ownership. It is usually issued from a book with perforated leaves similar to a check book, with stub to carry the essential data of the certificate. Directly from this stub, or through the medium of a stock journal, postings are made to the individual accounts in the stock ledger. This ledger which, in turn, is controlled by the Capital Stock account or accounts on the general ledger, carries the detailed information as to the number of shares issued, shares canceled, and balances held by each owner.
The Stock Transfer Book.—In the state of New York a stock transfer book must be kept, showing all the data in connection with transfers of shares, such as old and new stock certificate numbers, names of the parties, etc.
The Minute Book.—To preserve a record of the meetings of the directors and stockholders, and the business transacted thereat, use is made of a minute book kept by the secretary. This book, as the source of authority for all the important acts and policies of the corporation, is a most important record. The record should be a complete history of the corporation from its organization through the entire period of its existence.
Other Records.—When the stock is sold on the instalment plan, formal receipt of the payment of each instalment is sometimes made by means of an “Instalment Scrip Book,” whose certificates or receipts are issued upon payment of each instalment. When full payment has been made, the instalment certificates are exchanged for the regular certificates of stock. A dividend book for recording the payment of dividends is sometimes kept, though the need for such a record has been largely eliminated through the use of dividend checks.