§ 117. The Uses and Purposes of Incorporation.
There is probably nothing which the law can do by the aid of the conception of incorporation, which it could not do without it. But there are many things which it can by such aid do better or more easily than would otherwise be possible. Among the various reasons for admitting this fictitious extension of personality, we may distinguish one as of general and fundamental importance, namely, the difficulty which the law finds in dealing with common interests vested in large numbers of individuals and with common action in the management and protection of such interests. The normal state of things—that with which the law is familiar, and to which its principles are conformed—is individual ownership. With a single individual the law knows well how to deal, but common ownership is a source of serious and manifold difficulties. If two persons carry on a partnership, or own and manage property in common, complications arise, with which nevertheless the law can deal without calling in the aid of fresh conceptions. But what if there are fifty or a hundred joint owners? With such a state of facts legal principles and conceptions based on the type of individual ownership are scarcely competent to deal. How shall this multitude manage its common interests and affairs? How shall it dispose of property or enter into contracts? What if some be infants, or insane, or absent? What shall be the effect of the bankruptcy or death of an individual member? How shall one of them sell or otherwise alienate his share? How shall the joint and separate debts and liabilities of the partners be satisfied out of their property? How shall legal proceedings be taken by or against so great a number? These questions and such as these are full of difficulty even in the case of a private partnership, if the members are sufficiently numerous. The difficulty is still greater in the case of interests, rights, or property vested not in individuals or in definite associations of individuals, but in the public at large or in indeterminate classes of the public.
In view of these difficulties the aim of the law has been to reduce, so far as may be, the complex form of collective ownership and action to the simple and typical form of individual ownership and action. The law seeks some instrument for the effective expression and recognition of the elements of unity and permanence involved in the shifting multitude with whose common interests and activities it has to deal. There are two chief devices for this purpose, namely trusteeship and incorporation. The objects of trusteeship are various, and many of its applications have a source and significance that are merely historical. In general, however, it is used as a mode of overcoming the difficulties created by the incapacity, uncertainty, or multiplicity of the persons to whom property belongs. The property is deemed by the law to be vested, not in its true owners, but in one or more determinate individuals of full capacity, who hold it for safe custody on behalf of those uncertain, incapable, or multitudinous persons to whom it in truth belongs. In this manner the law is enabled to assimilate collective ownership to the simpler form of individual ownership. If the property and rights of a charitable institution or an unincorporated trading association of many members are held in trust by one or two individuals, the difficulties of the problem are greatly reduced.
It is possible, however, for the law to take one step further in the same direction. This step it has taken, and has so attained to the conception of incorporation. This may be regarded from one point of view as merely a development of the conception of trusteeship. For it is plain that so long as a trustee is not required to act, but has merely to serve as a depositary of the rights of beneficiaries, there is no necessity that he should be a real person at all. He may be a mere fiction of the law. And as between the real and the fictitious trustee there are, in large classes of cases, important advantages on the side of the latter. He is one person, and so renders possible a complete reduction of common to individual ownership; whereas the objections to a single trustee in the case of natural persons are serious and obvious. The fictitious trustee, moreover, though not incapable of dissolution, is yet exempt from the inevitable mortality that afflicts mankind. He embodies and expresses, therefore, to a degree impossible in the case of natural trustees, the two elements of unity and of permanence which call for recognition in the case of collective interests. An incorporated company is a permanent unity, standing over against the multitudinous and variable body of shareholders whose rights and property it holds in trust.
It is true, indeed, that a fictitious trustee is incapable of acting in the matter of his trust in his proper person. This difficulty, however, is easily avoided by means of agency, and the agents may be several in number, so as to secure that safety which lies in a multitude of counsellors, while the unity of the trusteeship itself remains unaffected.
We have considered the general use and purpose of incorporation. Among its various special purposes there is one which has assumed very great importance in modern times, and which is not without theoretical interest. Incorporation is used to enable traders to trade with limited liability. As the law stands, he who ventures to trade in propria persona must put his whole fortune into the business. He must stake all that he has upon the success of his undertaking, and must answer for all losses to the last farthing of his possessions. The risk is a serious one even for him whose business is all his own, but it is far more serious for those who enter into partnership with others. In such a case a man may be called upon to answer with his whole fortune for the acts or defaults of those with whom he is disastrously associated.
It is not surprising, therefore, that modern commerce has seized eagerly upon a plan for eliminating this risk of ruin. Incorporation has proved admirably adapted to this end. They who wish to trade with safety need no longer be so rash as to act in propria persona, for they may act merely as the irresponsible agents of a fictitious being, created by them for this purpose with the aid and sanction of the Companies Act. If the business is successful, the gains made by the company will be held on behalf of the shareholders; if unsuccessful, the losses must be borne by the company itself. For the debts of a corporation are not the debts of its members. Si quid universitati debetur, singulis non debetur, nec quod debet universitas singuli debent.[[294]] The only risk run by its members is that of the loss of the capital with which they have supplied or undertaken to supply the company for the purpose of enabling it to carry on its business. To the capital so paid or promised, the creditors of the insolvent corporation have the first claim, but the liability of the shareholders extends no further.
The advantages which traders derive from such a scheme of limited liability are obvious. Nor does it involve any necessary injustice to creditors, for those who deal with companies know, or have the means of knowing, the nature of their security. The terms of the bargain are fully disclosed and freely consented to. There is no reason in the nature of things why a man should answer for his contracts with all his estate, rather than with a definite portion of it only, for this is wholly a matter of agreement between the parties.
§ 118. The Creation and Extinction of Corporations.
The birth and death of legal persons are determined not by nature, but by the law. They come into existence at the will of the law, and they endure during its good pleasure. Corporations maybe established by royal charter, by statute, by immemorial custom, and in recent years by agreement of their members expressed in statutory forms and subject to statutory provisions and limitations. They are in their own nature capable of indefinite duration, this being indeed one of their chief virtues as compared with humanity, but they are not incapable of destruction. The extinction of a body corporate is called its dissolution—the severing of that legal bond by which its members are knit together into a fictitious unity. We have already noticed that a legal person does not of necessity lose its life with the destruction or disappearance of its corpus or bodily substance. There is no reason why a corporation should not continue to live, although the last of its members is dead; and a corporation sole is merely dormant, not extinct, during the interval between two successive occupants of the office. The essence of a body corporate consists in the animus of fictitious and legal personality, not in the corpus of its members.[[295]]