II. Corporations: Their Early Beginnings

[This is the second of a series. Why this series on corporations?]

Beyond the individual, the family, the church and the state, there have always existed associations of people who act as a group. In early times, such associations may have been hunting parties, harvesting groups, gangs, villages, tribes and the like. Somewhere during the development of civilization, some of these associations evolved into today’s corporations.

When did this evolution begin? (Hint: It was long before the nineteenth century.)

To even attempt to answer that question, we first need to have an idea of what a corporation is so that we know what to look for.

In essence, a corporation is an entity that (1) holds and expends resources of monetary value (capital), (2) has a legal existence independent of any natural person or group of natural people living at any particular time, and (3) has a management that is different from the providers or owners of its capital.

A private business corporation is only one kind of corporation. Corporations may be towns, educational institutions, religious institutions, religious communities, and charitable organizations, as well as profit-making businesses. A key feature of a corporation is its independent existence apart from living people. (One historian traces the origin of the corporation to the family, which has a continued existence beyond the family members living at a particular time—Ancient Law, pp. 178 ff; see “References” below. However, a family is not a corporation; the latter has additional characteristics.)

A consequence of this independence and structure is that people or entities that provide capital to the corporation are protected from any of the corporation’s liabilities that may exceed the capital provided to it. That is, the providers of the capital (investors or owners) have “limited liability.” In practical terms, that means that a corporation may go bankrupt without bankrupting the investors or owners.

Thus, a corporation is not like a family or any ordinary organization of people. If all of the participants of an ordinary organization die, the organization dies. A corporation would continue to have a legal existence (though it may die for other reasons). Historically, before there was a corporate option to form a business, businesses were run by individuals and teams of individuals (partnerships). If all of these individuals died, the business died. In addition, if the business was sued because its products were harmful (assuming such suits were possible in those days), each of these individuals would be liable to pay the damages, even if it took everything these individuals owned. But if these individuals could have instead formed a corporation, the damages owed would not exceed the amount of capital the individuals had contributed to the corporation. The rest of their assets could not be used to pay the damages. (There is an exception if the corporation is too completely tied to one or two people.)

An advantage of the corporate structure, therefore, is that a corporation can obtain and use capital and risk failure without risking the economic survival of those who provided the capital.

When and where in history did such an entity begin to exist?

Unlike specific historical events, it cannot be said that corporations began on a specific date. If there was a “first” corporation, we may never know when it happened or what it was, although there are some informed guesses. Suffice it to say, as two writers noted:

In the early Middle Ages, jurists, elaborating on Roman and canon law, slowly began to recognize the existence of “corporate persons”: loose associations of people who wished to be treated as collective entities. These “corporate persons” included towns, universities, and religious communities, as well as guilds of merchants and tradesman. Such associations honeycombed medieval society. . . .

(Quoted from The Company, p. 12; cited in full in “References” below.)

Prior to the Middle Ages, the concept of corporate entities can be found in Roman law, dating back to the late third century B.C. (The Company, p. 4.)

So the concept of the corporation developed very gradually beginning even prior to the Middle Ages. Corporations set up for private commercial purposes developed later. A commercial corporation, Aberdeen Harbour Board (Scotland), was set up in 1136. (The Company, p. 12.) Some believe the first European private business corporation still in existence was Stora Kopparberg of Sweden, which was issued a royal charter in 1347 and is the predecessor of today’s Finish company, Stora Enso Oyj. (The Company, p. 12; supplemented by information on Wikipedia.) 

The importance of this historical background is to know that corporations and corporate personhood did not just come into existence in modern times. It’s an ancient idea that continued to grow and develop into the modern corporation. The next few posts in this series will briefly outline this development. That will help us understand the corporation today.

And tomorrow? We would be short-sighted to believe that this process of historical change has ended. 

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Go to the first post in this series on corporations.

References:

Joseph Stancliffe Davis, Essays in the Earlier History of American Corporations, Vol. 1, (New York, 1965; originally published 1917)

Melvin A. Eisenberg, The Structure of the Corporation (Boston and Toronto, 1976)

Robert W. Hamilton, The Law of Corporations, 4^th ed. (St. Paul, MN, 1996)

Henry Sumner Maine, Ancient Law, 10^th ed. (Gloucester, MA, 1970; originally published 1861)

John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (New York, 2003)

Wikipedia.org (used with caution; it contains errors)