Corporation

Also referred to as limited liability corporation. A type of legal entity provided for in the laws of most modern economically developed countries that two or more investors may agree to create for the purpose of combining some of their resources and going into business together. Corporations have the status of "artificial legal persons" and thus may own property, make contracts, be held responsible for committing crimes or torts, initiate court actions such as lawsuits, and so on. In the United States, businesses organized as limited liability corporations must indicate their status as such by including the word "Incorporated" ("Inc.") in the name of the firm. In other countries, the same purpose is served by using the equivalent abbreviations "Ltd." (Limited) or "S.A." (Anonymous Society) at the end of the company's name. It is today by far the most widespread and successful form of ownership of business property in all advanced capitalist countries.

The key feature of the modern business corporation that sets it apart from simple partnerships and sole proprietorships is that it provides the owners of the business with the important legal protection of "limited liability," whereas these other forms of business organization generally do not. If a failing business enterprise that is owned as a sole proprietorship or partnership is unable to generate enough money to pay its bills, the personal liability of the owners is unlimited -- that is, the unpaid creditors of the business can take legal action to seize not only any assets directly connected with the business itself but also the personal property of any individual owner as well, up to the full amount of the debt. But if a limited liability corporation goes belly up, the legal claims of the company's creditors normally can extend only to the assets actually owned by the corporation in its own name, and not to the individually-owned property of the company's shareholders. The individual owner's shares in the corporation might become worthless if the business fails, but he or she does not have to worry about the Sheriff showing up to seize the house or the car or the family bank accounts to pay off the rest of what the company's creditors are owed.

Protection from personal liability makes it much safer and therefore more attractive for more individuals to use some of their savings to become part-owners of very large business organizations. Without limited liability, even the tiniest investment would put a shareholder's entire remaining fortune at risk. During the Middle Ages and the early years of the Industrial Revolution, the corporate form of ownership for business organizations was generally available only as a very special privilege occasionally awarded by the government to a handfull of royal favorites. But changes in the legal codes of Great Britain, the United States, France and other economically progressive countries during the 19th century removed most of the practical barriers to widespread adoption of the corporate form of ownership. This made it much easier to raise capital for new business enterprises. By allowing for pooling the savings of hundreds, thousands, or even millions of individual investors at manageable levels of risk, the widespread adoption of the corporate form of business ownership made extremely large scale private investment projects practical for the first time in history, thereby contributing greatly to the modern era's historic surge in economic growth that continues up to the present day.

[See also: property rights]