So, you think that eliminating corporate personhood status is the way to go, eh? Let me explain to you why it isn't a good idea. FLIP!
Just to cover the appropriate disclaimers, I'm by no means an expert on business law. I have, however, spent the last 10 weeks in a business organizations class, so this information is fresh in my mind. In 2 more weeks I'll finish the class and move on, so it may not be as fresh then. So let me make my professor proud and give everyone a basic lesson in corporate structure and its role in the litigation process.
How You Make a Corporation
In order to create a corporation, you have to file a form known as Article of Incorporation with the Secretary of State in the state that you wish to incorporate (example). On this form you are required to indicate:
- The name of your corporation;
- A registered agent and office, which is the official record that indicates where a court sends the summons when somebody decides to sue your corporation;
- The initial Board of Directors;
- Information about your initial stock offering;
- Your business purpose, which must be lawful. A generic statement of "The purpose for which the corporation is formed is for the transaction of any and all lawful business for which a for-profit corporation may be organized under the [STATE APPLICABLE BUSINESS CODE]" will usually suffice. You can be more specific if you want to;
- Any supplemental provisions you want to add;
- The name of the person who is preparing the forms for you, e.g. an attorney;
- An indication of when you want your filing to be effective; and
- Your filing fee, which varies by state. In Texas it's $300.
Once your file your form and the Secretary of State issues you a corporate number, you have a corporation of your very own.
Congratulations, It's a Corporation! Now what?
Actually, you aren't quite a Corporation just yet. Now you need to have your initial meeting of the Board of Directors, draft and adopt your bylaws, issue your initial shares of stock, and a few other tidbits of paperwork. When all of that is done, then you're a corporation.
From then on, and for every year you are in existence, you have to continue making the proper filings with the state and the feds and the SEC, keep a log of your meetings, amend your bylaws, manage your shares and keep track of all your shareholders, and make money.
If you fail at any of those things, you could be in trouble. Big trouble. But we'll get to that momentarily.
Why Do I Make A Corporation?
There's a lot of work and effort involved in setting these entities up. Why does anybody do it?
- Personal liability protection is the primary reason. You want to go into business to make money, but if something bad happens and you get sued, you don't want to lose your house and your 401k and your tax refund because of it. And given that we live in a highly litigious society, you know somebody will eventually try to sue you for something.
Because your corporation needs money to make money, in order to attract investors you also have to be able to offer them personal liability protection. Without it, who would want to invest in a business when they could be sued personally by any wank with an attorney? Should you be personally liable because you gave your buddy $1,000 toward his business, then he screwed up and is now getting sued?
Absolutely not. Ergo, personal liability protection is a vital component to any business, not just corporations, to attract the money they need to get started making money.
- Tax breaks. Yes, corporations get tax advantages. I'm not a tax expert and don't pretend to be, but suffice it to say that some people find their investment return is greater when it goes through the corporate filter than it is if it goes directly to them as an individual. I'll leave it to the beancounters around here to fill in the details.
- Perpetual existence. Ah, this is an interesting one. Don't all companies exist perpetually, you ask. No, they don't. Other forms of business structures usually run for a finite amount of time, and at the end of that time they have to either refile themselves, or dissolve. With a corporation, you exist perpetually without requirements to renew on an annual basis. You can set an end date on your Articles of Incorporation, and there are cases where that happens, but usually you want your business to continue indefinitely.
- Freely Transferable Shares. In other business structures, you can't just sell your share and walk away when you've decided that you have had enough. In a corporation, you can, which creates business continuity and makes it easier to attract investors.
Blah, Blah BK. So why personhood status?
One of the defining characteristics of a corporation is it's personhood status, which is the subject of question in Eternalhope's diary.
Why do corporations have this? Why do they need this? Why shouldn't we just get rid of it?
First of all, the reason that a corporation has personhood status is so it can sue and be sued, enter into contracts, own property, and pay taxes.
Think for a minute why this is important. If a corporation couldn't, for example, sign it's own lease agreement, you would have to get signatures on a lease from each Board of Director, each Officer, and possibly each and every shareholder. Same thing with entering into business contracts - if you weren't treated as a "person" by the law, you couldn't enter a contract. No contract = no business.
As a legal person, you are expected to pay taxes, which corporations do. Granted, the tax law is wonky and they get all kinds of breaks, but that's not really because corporations are granted personhood, is it? That seems more like a tax law issue to me, not a legal entity status.
But the most important feature, and the one people seem to be carrying on most about, is the ability to sue or be sued. You want corporations to have personhood status. I see you shaking your head no, but YES YOU DO.
From the corporations that can sue standpoint, you basically have the same situation as I described with entering contracts and paying taxes. If the corporation itself couldn't be a party to the lawsuit, you'd have to name every Director, Officer, and possibly shareholder in the petition. That means they'd all have to AGREE to filing the lawsuit.
What if you have 9 directors and 15 officers? Do you think they might all agree, all the time, on the necessity of the lawsuit? And heaven forbid your state decides that you have to get shareholder approval, too. In short: good luck ever getting into court.
The only way to avoid this nightmare is to grant corporations the ability to file lawsuits as an individual would, and that requires that the law regard them as "people."
And now for the cherry: your ability to sue the corporation.
The prevalent argument I saw in the aforementioned diary was the desire to hold Directors and Officers personally liable for the harmful acts of a corporation. While I agree that the morally right thing to do is to snag them by the shorthairs for their complicity in environmental and social ills, from a legal standpoint that's not very smart.
If corporations lacked personhood status, and you wanted to sue one, who would you go after? Let's assume there was no personal liability protection, and you could sue the Directors and Officers and Shareholders directly. What would be the legal effort involved?
First, you may or may not be able to sue them collectively. More likely than not, you'd have to pursue each one individually. So if we just stick with 9 Directors and 15 Officers, you're filing a potential 24 petitions.
Second, you have to establish jurisdiction and venue. That is, you have to prove to the court in your original petition that the court has the right to even hear the case. So what if each of your 24 Defendants lives in a different city or state? You could be challenged on 24 fronts on grounds of improper venue, which if won would get your case thrown out of the court you filed originally and force you to start over.
But let's assume we make it past those items. For each case, you would be forced to prove that the individual had knowledge of the wrongs that were committed, and acted negligently so as to create harm to you. Do you think you'd be able to get all 24? What if the source of the problem was actually 2 of the officers? If you lose your case against the other 22 from that, you could be on the hook for their legal fees while your continue your pursuit of the 2 who committed the tort.
(Is any of this beginning to sink in yet?)
So let's pretend that we can get past those issues as well, and assume that you are able to prove your case in civil court and win. And let's pretend that you get a great judgment in your favor, say $1 billion.
What if the collected assets of the 2 people don't equal $1 billion? What if the collected assets of the 24 don't equal $1 billion? How do you get your money? More accurately, how does an attorney get the money for his client(s)?
"Congratulations! You won a $1 billion judgment to pay for your lifelong medical bills! But, er, well... I can only actually collect $8 million of that for you. And $2.5 million of that is mine. Here ya go!"
Fact is, if this were the system we had in place you folks would be SCREAMING for the ability to get the money directly from the corporation. But the only way to do that is to create a legal definition for the corporation to be treated as a person.
Sue the corporation.
One defendant, one venue, one settlement. KISS.
Great, thanks. So they win.
Not always. Sure, the deck is stacked heavily in their favor, and when the political climate is such that it wants to protect corporations even more, it can make it really really difficult. But there are ways.
You can try piercing the corporate veil, which is a matter of proving to the Secretary of State that the corporation didn't adhere to some rule of the business code. That could result in the corporation getting its charter revoked, but really that's only useful for small shell corporations where the money really is held by the people behind it. That's the "I can just incorporation myself to avoid liability!" argument that Eternalhope mentioned; you really can't just incorporate yourself. It's not a free pass, because the law can get around it easily.
You could get together with some deep-pocketed like-minded friends and stage a hostile takeover of the corporation. If you don't like the Board of Directors or Officers, the quickest way to effect change is to buy a lot of their stock and get voting rights. But that gets you into a whole other area of legal hassle, so be prepared.
You could try to demonstrate that the business was unlawful. Nobody gets legal protection for breaking the law... well, unless you're Bush.
My point of all this is that the problem with corporate entities is not their personhood status under the law. We need that, they need that. It's ok.
The problem is that corporations are only concerned with profit for shareholders, which translates into more money for the corporation. It's the Directors and Officers holding shares in the corporation as part of their compensation, which encourages them to make irresponsible business decisions in the pursuit of enriching themselves. It's the tax laws that let them get away with it, and that give corporate welfare even when the profits are an insane $3 million/day (Exxon).
I know people are frustrated, I am to. But think, and focus your energy where it needs to go. And please, don't fall for the knee jerk shit of whatever you're angry about at the moment. Our defining quality is the ability to reason - USE IT.