In addition to size and organization, changes were also taking place in the legal concept of the business firm—the change from sole proprietorship and partnership organization to corporate organization (Economic Reasoning Proposition 4, laws and rules matter). The corporation gained prominence chiefly because some businesses required more capital than one person or a few people could provide. By 1810, the corporate form was commonplace for banks, insurance companies, and turnpike companies; in ensuing decades, canals and railroads could be financed only by tapping various sources of funds, from small merchants and professionals along proposed routes, to English capitalists thousands of miles away.
When it first appeared in the United States, the corporation lacked many of its present-day characteristics. Charters were granted by special acts of legislatures, and the question of the liability of stockholders was far from settled. Nevertheless, the corporation had a number of advantages over the sole proprietorship and the partnership, and its legal status came to be better defined than that of the joint-stock company. Of its unquestioned advantages, the most notable—in addition to the obvious one of attracting greater numbers of investors—were permanence and flexibility. The partnership and the sole proprietorship have one inescapable drawback: If one partner or the proprietor dies, the business is dissolved. The business can go on, of course, under a new partnership or proprietorship, but continuity of operation is contingent on the lives of particular individuals. The shares of a corporation, however, can be transferred, and investors, whether small or large, can enter and leave the business without destroying the structure of the corporation.
Early corporations did not have certain advantages that corporations have today, such as limited liability. Stockholders of the English joint-stock companies typically assumed “double liability”—that is, the stockholders were liable to the extent of their investment plus a like amount—and some states experimented with charters specifying either double liability or unlimited liability. After 1830, however, various states passed statutes providing for limited liability, and by 1860, this principle was generally accepted. Under limited liability, stockholders of a failed corporation could lose only the money they had invested in the venture.
The early requirement that incorporators of banks, insurance companies, canals, and railroads obtain their charters by the special act of a state legislature was not always a disadvantage. For those who had the political connections, this involved little uncertainty and expense, and obtaining a charter with exceptionally liberal provisions was always a possibility. Nevertheless, the politically unfavored could spend years lobbying futilely for corporate charters. As early as 1800, those who looked on incorporation by special act as “undemocratic” were agitating to secure “general” acts of incorporation—laws making it possible for any group, provided it observed and met prescribed regulations and requirements, to obtain a charter. Others, fearful that the corporation would spread too rapidly if their elected representatives did not review each application for charter, opposed general acts. In 1837, Connecticut passed the Connecticut General Incorporation Act, the first general act that made incorporation the right of anyone.
From that date, permissive general acts (acts allowing, but not requiring, incorporation under their provisions) were gradually placed on the statute books of most of the chief manufacturing states, and before 1861, the constitutions of 13 states required
Incorporation under general laws. In those states where permissive legislation had been enacted, incorporators continued until about 1870 to obtain special charters, which enabled the incorporators to secure more liberal provisions than they could under general laws.2
World History
