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Business and Corporate Law - Further Readings

corporations partnership limited trade

Historical Development
By far the most universal and resilient of business structures, both on the national and international level, is the corporation. Most state, federal andinternational regulatory control is directed at corporate business. Therefore, more emphasis is placed on corporations than on other business forms in thediscussions that follow.
Corporate business structures date back to at least the sixteenth century, when merchants of England faced not only the perils of dangerous sea voyages, but also the prospect that they and their descendants could be liable for cargo losses due to bad weather or pirates. Some early well known corporations include the East India Company and the Hudson's Bay Company, and many Americancolonies were themselves chartered as corporations. Early corporate chartersconsisted of a grant from the crown that limited investors' liability for losses of the corporate assets equal to the amount of their investments. The early corporations were also granted monopoly powers over territories and industries that were considered critical to the interests of the English state.
As the U.S. Constitution makes no specific reference to corporations, the individual states retained the power to regulate them. By 1800, about 200 corporate charters had been granted by the states. In 1886, the U.S. Supreme Courtruled, in Santa Clara County v. Southern Pacific Railroad, that a private corporation is a "natural person" under the U.S. Constitution, and therefore protected under the Bill of Rights, including the right to free speech and other constitutional protections (excepting those of the privileges and immunities clause). Big business expanded rapidly across America and the world.In 1901, J.P. Morgan and John D. Rockefeller joined forces to control 112 corporate directorates, combining $22.2 billion in assets under the entity of the Northern Securities Corporation of New Jersey. In today's terms, that massive sum of monies would be the equivalent of the total assessed value of thirteen to fifteen of the southern states of America.
Today, the corporate charter is a grant of privilege extended by a state to one or more investors to serve a public purpose. Most states have standardizedtheir requirements for the formation, continuation and dissolution of corporations by adoption of the Model Business Corporation Act (MBCA). Corporationsremain the most popular form of business structure because of their limitedliability, their perpetual life, the ease with which they can raise capital,the transferability of their shares or interest, and the limitations placed on the powers of the shareholders that bind the corporation.
Corporations Distinguished
A "proprietorship" is a declaration to operate as a business, such as an entrepreneurship. It requires no special documentation to be created, but local regulation may require the filing of "DBA" ("doing business as . . . ") documents in the county clerk's office. The business itself is usually not taxed onits earnings; rather, the earnings (or losses) are passed on to the proprietor as personal income or loss. Taxes are generally lower than that of a comparably-sized corporation, which would also pay taxes on income paid out as nondeductible dividends. This often creates more "up-front" operating funds forthe business. However, an important disadvantage of proprietary business is that personal liability attaches to any debts incurred by the business. This means that if a proprietorship defaults on payment for business equipment, theindividual proprietor's personal assets are at risk. Civil suits, includingthose for personal injury, would name both the business and the owner as defendants, or combine them, e.g., "John Doe, individually, and John Doe and Associates, Defendants." Additionally, the assets and liabilities of the proprietorship can only be voluntarily transferred by sale, gift or testamentary disposition, along with the relinquishment of managerial authority.
General partnerships are voluntary associations of two or more individuals who work together for a common business purpose. Profits and losses are sharedequally, and principles of agency apply. This means that each partner is an agent of the partnership, is liable for all partnership debts, and can bind the partnership and other partners through his/her actions or conduct. No formal state requirements are necessary to form or maintain a partnership, but partners commonly enter into written agreements to specify their understanding of the allocation of profits or responsibilities. Like a proprietorship, a partnership does not pay income tax, and profits pass directly to the partners as personal income. In addition to the disadvantage of potential personal liability for each partner, partnerships also lack business continuity. A partnership is deemed dissolved as a matter of law, without formal or documentary action, whenever a partner dies, retires, or otherwise violates the terms of the partnership. Bringing in new partners creates a new partnership, often accompanied by the shuffling of responsibilities and new allocations of shared interest according to the respective contributions of time, money or skill to the partnership. Again, the law presumes equal sharing of profits, irrespective of individual contribution, unless there is a contractual agreement betweenparties to the contrary.
A subspecies of partnership is that of the "limited partnership, " which, asthe name implies, limits the liability of the limited partners to the extentof their investment in the partnership. No personal liability can attach beyond that. However, mostly out of concern for an unknowing public which may deal with the limited partnership, its creation is contingent upon the filing ofa certificate of limited partnership with a designated state agency, typically the secretary of state. (Most states have adopted the Uniform PartnershipAct to standardize the requirements of both general and limited partnershipsin the eyes of the law.) Associated with the limited liability of a partner is the restriction of limited management in the affairs of the partnership, and a limited partner who participates in partnership business may be strippedof limited liability in any subsequently-litigated dispute. A limited partnership, therefore, must have at least one general partner who assumes responsibility for the management of the partnership.
Corporations, by contrast, are entities created solely by the state. Upon thefiling of requisite forms for incorporation with appropriate state offices,a certificate of incorporation is then granted. The corporation is presumed to exist perpetually unless affirmatively dissolved. Corporations differ fromother business forms in that the corporation itself owns corporate property;investors only own shares of interest in the corporation. Thus, a corporation's creditors normally cannot reach a shareholder, and a creditor of a shareholder cannot reach the corporation. An exception to this is the theory of "piercing the corporate veil," where the corporation is used to achieve criminalor personal objectives which serve to defeat public policy or interest.
Management of corporate business is accomplished through a board of directorselected by shareholders having voting rights commensurate with the class ofstock they own. Most for-profit corporations are "publicly held" and sell shares of stock on the open market, following the publication of a "prospectus"to potential investors which is intended to advise them of the corporation'sfinancial health, stock performance, anticipated growth, and associated risk.Despite constant changing of shareholders and their respective controls of interest, corporations continue to exist, merge, split into parent and subsidiary companies, and otherwise restructure without interruption of the corporate status in the eyes of the law.
Nonprofit businesses or associations (including trusts) have the added advantage of tax exemption and limited immunity or indemnification of trustees, officers or directors from personal liability. However, in most states, nonprofit corporations can be sued as in thr same manner for-profit corporations.
State Regulation of Business
States apply the provisions of the Uniform Commercial Code (UCC) to all businesses involved with commercial transactions (sales of goods, some services, commercial paper, bank deposits and collections, letters of credit, bulk transfers, warehouse receipts, bills of lading, investment securities, and securedtransactions). A wide array of state laws also protect individuals from business misconduct through various regulatory provisions, including licensing requirements regulating minimum standards for the providing of goods or services to consumers. Examples include the requirement for building permits and licensing of certain skilled trades and professions. Surprising, however, is thefact that many states do not require a business to maintain liability insurance, and judgments against those businesses may require forced dissolution orliquidation of business assets to satisfy such debts. Most states also have"long-arm" statutes to facilitate jurisdiction of state courts over out-of-state businesses whose products or services have caused harm within a state. Most states also recognize a "products liability" cause of action for defectiveproducts manufactured or sold by businesses.
Federal Regulation
On a national level, several federal agencies and entities have regulatory and enforcement powers over business concerns. Penalties include the impositionof fines, the revocation of licenses or charters, and the restriction of business transactions. Entities such as the Federal Wage and Labor Board insureprotection of business employees from unfair work requirements. The Environmental Protection Agency (EPA) and Occupational Safety and Health Administration (OSHA) protect both the environment and the workforce from harmful businesspractices and workplaces. The Securities and Exchange Commission (SEC) protects the public from illegal stock deals, "insider trading" to manipulate stock value, and fraudulent representation of corporate assets or status for thepurpose of inducing private investment. The Food and Drug Administration (FDA) regulates the sale and distribution of controlled substances and food or drug additives or products not tested or approved by it. The U.S. Department ofAgriculture regulates minimum standards for the quality of food products, and imposes strict liability for defective products. Antitrust acts protect thepublic from corporate monopolies and "price fixing." Bankruptcy laws ensurethat creditors and investors of businesses have their interests protected against illegal or fraudulent claims or defenses. Federal laws may also regulateand restrict the involvement of citizens with foreign businesses to protectnational interests. Examples include prohibitions on transactions with certain countries which may compromise national security interests, or certain transactions with those countries, such as arms sales or the importation of toxicor dangerous products. The above represents just a few examples of federal control over business interests.
International Business
After World War II, the push for a global economy led to the creation and development of three important transnational organizations: the International Bank for Reconstruction and Development (commonly known as the World Bank), theInternational Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT). The three agencies together, although formally designated as special agencies of the United Nations (UN), are commonly referred to as the "Bretton Woods" institutions, after a meeting of 44 nations in Bretton Woods, New Hampshire in July of 1944, to reach agreement on the future of global economy. Together and separately, they intended to address such global issues as growth rates of independent countries, expansion of exports, increased value of exports, attraction of new foreign investment, and the ability to repay debt.
However, in reality, to attract foreign investors, governments often suppressed union organizing to hold down wages, benefits and labor standards. They have given tax breaks and subsidies to foreign corporations and slackened environmental regulations. Falling prices for export commodities, increased demandfor manufactured imports resulting from reduced tariff barriers, and profitrepatriation by foreign investors have resulted in continuing trade deficitsfor most countries. In 1992, low-income countries' excess of imports over exports increased from $6.5 billion to almost $35 billion. In 1993, the United States executed the controversial North American Free Trade Agreement (NAFTA)addressing the sharing of labor and resources between the U.S., Canada and Mexico. Most treaties and compacts also contain language incorporating "the most favored nation" clause guaranteeing reciprocal commercial concessions between covenanting nations. Behind the scenes of all this international economicreform and redress are transnational corporations.
On 1 January 1995, a new global entity, the World Trade Organization (WTO) was created by the GATT. The WTO essentially represents the world's highest judicial and legislative body for the adjudication and enforcement of substantive agreements relating to international trade and commerce.
Although the GATT-WTO is an agreement among countries, in truth, corporate membership on its private panels far exceeds that of private interests. A 1991study released by the Public Citizen's Congress Watch found that of 111 members of the three main trade advisory committees, only two represented labor unions. There was one unfilled seat for an environmental advocacy organization,and there were no consumer representatives. In sharp contrast, corporate interests were well represented, filling some 90-seats with representatives fromsuch giants as IBM, General Motors, Dow Chemical, AT&T, Bethlehem Steel,Time-Warner, 3M, Bank America, Corning, American Express, Mobil, Amoco and Hewlett-Packard. Of the 92 corporate representatives on the three advisory panels, roughly one-third of them had been assessed more than $12 million in fines by the U.S. Environmental Protection Agency (EPA). These same corporationshad collectively contributed nearly one million dollars in a failed attemptto defeat California's Safe Drinking Water and Toxics Enforcement Act, and put out another two million dollars to successfully defeat another California initiative called Big Green, which, among other things, would have imposed tighter standards for the discharge of toxic chemicals. Another example is in the tobacco industry. When Taiwan was working on a law to restrict cigarette sales, advertising and public smoking areas, the U.S. trade representative responded by threatening to call for trade sanctions against Taiwan.
When such a concern is brought before the WTO, the contending parties presenttheir case in a secret hearing before a panel of three experts whose identities remain confidential. There is no provision for the presentation of alternative views, such as amicus (friend of the court) briefs, from nongovernmental organizations, unless the panel chooses to solicit them. The WTO hasthe authority to recommend trade sanctions, penalties, or both, which are voted upon by the membership. The downside to this is that it must be remembered that the WTO is a trade organization, and its mandate is to eliminate barriers to international trade and investment, a shot in the arm for transnational corporations.
Going into the twenty-first century, transnational corporations and businessconflicts of interest remain global priorities. To be sure, the creation of business profit is necessarily predicated upon the creation of correlative debt. The interrelationship and interdependency between world trade and corporate profit all but wholly controls the global economy. International manipulation of trade barriers, tariffs, bans, treaties and other regulatory red tape continues to warrant review and control. Of continued concern is the ability of corporations to use their economic power to drive out competitors from themarket, to absorb competitors by merger and acquisition, or to form allianceswith competitors to control pricing and market territory. Federal anti-trustlaws have limited power on the international front.
One area requiring increased attention is that of intellectual property rights--copyrights, patents and trademarks. U.S. companies have successfully pursued extended patent protection for all genetically-engineered organisms, frommicroorganisms and seeds, up to plant and animals (excluding only genetically-engineered humans). By patenting the processes by which genes are inserted into a species of seeds, a few corporations have obtained monopoly rights overgenetic research. Proponents argue that such control will aggressively promote agricultural genetic research and improve global food security. Critics argue that it will prevent private research among farmers and businesses not working for the patent-holder, effectively preventing the growth of independentseed stocks without the payment of royalties.
The electronic transmission of information transnationally raises numerous concerns too complex for discussion at this time. It is sufficient to say thatthe future of a global economy is dependent upon the communication of information from forum to forum, most of it through private business venture. Continued global effort toward uniformity of regulation, in combination with the establishment of enforcement powers, is key to the future of business around the world.
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