Friday, April 30, 2010

Those Evil Corporations

It is curious to me, as a lawyer who has worked for corporations, and formed corporations for clients, to see how much lightning they can attract in a down economy.  Who is to blame for our economy?  The Corporations!  Who should not be allowed to influence our public debate?  The Corporations!  Who is responsible for any harm done anywhere in the world - the Corporations!  If there is a mine explosion, who is responsible:  the Mine Safety Officer, the OSHA inspectors, the union safety representative, a co-worker who made a mistake that day, the inherent dangers of deep mining … or THE CORPORATION?  As I sit here in my office, I receive heat, light and water from corporations.  My furniture is largely made by corporations.  My office equipment - desk phone, cell phone, computer, internet access - is all manufactured, transported, marketed, sold and delivered by corporations.  I pay my rent to a management corporation, which then sends the check to the owner, a Pennsylvania non-profit corporation.  Clients come to me and ask me to form corporations for them.  Corporations are everywhere, and provide everything in our economy.  So what actually are these "corporations" and why do they have the capacity for such evil?

Just like trying to explain what an "American" is, there is no one simple answer.  A corporation is a legal entity, like a trust or a partnership, that is permitted to be created under state law, and given a legal life subject to the duties and responsibilities of the applicable state law.  Corporations can be owned by thousands of people or one person.  They can be for profit or non-profit.  They can be stock or non-stock.  If they issue stock, if may be publicly traded or privately held.  There are C Corporations, and S Corporations, and limited liability corporations.  Some are taxed one way, some taxed in a different way.  Some are managed by a board of directors and a slate of officers, while others are managed like a partnership or sole proprietorship.  Some are registered with the federal Securities and Exchange Commission, others with the Pennsylvania Securities Commission, and others are registered only with the state office that tracks the birth and death of its state corporations.  The Pennsylvania Corporations Bureau notes on its website that is the records repository for more than 2.4 million companies that do business in Pennsylvania.  Upwards of 26 million companies do business and file tax returns in the United States. 

One of the more common fallacies I have heard is that many corporations pay no income tax.  That is a statement that has some truth to it - there are corporations that routinely pay no income tax - but the statement needs context before you can come to judgment on whether that is a good thing or a bad thing.  A corporation is treated as a separate person for filing tax returns, and so files local, state and federal income tax returns.  Originally, each dollar of income that came in to a corporation was taxed at a corporate rate (at both state and federal levels), and then if what remained was passed out to the owner, in the form of dividends, the owner paid tax on that income as well.  The same income was taxed twice.  The inherent unfairness of this result led to the authorization of Subchapter S corporations - where certain smaller corporations who elected this treatment would be treated the same as if they were partnerships or sole proprietorships - the income would "pass through" the corporate entity - and then would only be taxed to the owner who ultimately received the income.  The relatively new entity, the limited liability company, shares this characteristic as well - the income passes through and is taxed to the owner.  Non-profit corporations, formed for a charitable purpose, as a rule do not pay income tax on the income they receive.  They are doing work that might otherwise fall to the government to perform, and so as a matter of legislative grace, their income is not taxed.  Each of these corporations pay no income tax.  Is that a good thing or a bad thing?  

With the organizational and management paperwork, the multiple filings, the double taxation, the bad press of being a "corporation" in a politically correct society, why would anyone choose to do business this way?  The main benefits of the corporate form have always been (1) the ability to pool resources of many people in order to undertake a particular venture or business, combined with (2) the limitation of the liability of the owners to the money they put at risk.  If the owners put money into the corporation, if they dot their i's and cross their t's and run the business professionally, and if ultimately the business is a failure, then the owners lose their investment in that business, but they do not lose everything else that they own.  Creditors can pick over the carcass of the failed corporation, but generally they can not come after the owners of the business (with some exceptions as always for the people who abused the privilege).  If you owned 100 shares of General Motors when it went bankrupt, then you would have lost your investment, but you would not be forced to liquidate your bank accounts and sell your home in order to pay the creditors of the company for any shortfall that they can not collect from the assets of the company.  As an owner of that business, you have limited liability. 

The corporation, with its ability to pool resources, spread risk, and limit liability, is the engine of our economic system, here and in the world at large.  The only other economic system that has tried to improve upon this system is communism, where the government owns all of the property, and so provides resource pooling, risk spreading and limited liability for its owners - the entire population.  That experiment lasted for most of the 20th century, but the result is largely on the ash heap of history.  It did not take into account what motivates people to work hard and take risks - the promise of some commensurate reward. 

The corporations I have been involved are all run by people, and employ people, and their officers and directors are people, their accountants and engineers and management and secretaries are all people, and with so many people in the process, they come with the baggage of the human condition.  When there is excess - greed, stupidity, foolishness, negligence - then it is because of the people involved, not the legal entity they chose to conduct their business.  Blame the people involved, not the "corporations".

©2010  Douglas P. Humes

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