Former Republican Presidential Candidate Mitt Romney famously said that “corporations are people, my friends.” His comment was in response to complaints by some people about the Supreme Court’s Citizen United case that allowed corporations to donate to political campaigns. I suspect that what Romney was trying to say was that people are heavily involved in corporations, essentially that people create and own corporations, and hence profit from the, and many other people work at corporations, and hence owe their livelihoods to corporations. In this he is correct, but still misses the point.
Exactly the same thing can be said about buildings. People make money from building buildings and from owning buildings, and many people go to work every day in buildings. But we can all see the absurdity in saying that “buildings are people, my friends.” Simply alleging that because many people rely on buildings, or corporations, for their livelihood and well being, does not make a building, or a corporation, a person.
Corporations are an artificial business entity that allows the owners of a business to limit their risk. While this may sound like a dodge, or a way to avoid responsibility, the reality is that this limitation of liability is actually a very good thing. Many high risk endeavors throughout human history might not have been attempted without this limitation of risk. A number of the first American colonies were business ventures and were formed as government chartered corporations. This allowed the investors to invest money in the enterprise without the potential future risk of paying out more of their personal assets should the endeavor fail. Throughout American history corporations have been an important component of the development of canals and railroads and other risky and capital intensive enterprises.
But just because corporations are important does not mean they are without fault. This shield against liability can make a corporation dangerous. The nation’s founders understood this, and in every state strictly proscribed corporations. Most states required that the incorporators obtain a charter granted by the state legislature. This greatly limited the number of corporations, and meant that the incorporators had to convince a legislative body of the need for the corporation and its ability to provide a societal benefit.
It was only after the Civil War, and the growth of large scale industrial companies, that states changed these laws and allowed for general, as opposed to specific, charters of incorporation. But politicians and the courts were still highly skeptical of corporations. Over the years, however, limits on corporations slowly eroded, as business interests lobbied state governments to ease rules and restrictions. Now there are few restrictions on the type and scope of business that a corporation can engage in.
And while most of the largest commercial enterprises in the nation are corporations, and those corporations employ millions of people, and are often the engine of our economy, some owners can and do abuse the corporate form. I am a lawyer and I’ve dealt with business entities that are made up of overlapping and intertwining corporate entities. The purpose for this is not to limit liability but to evade it.
It is very common for the developers of residential real estate to create a corporation for a project – say a residential subdivision – and then when the project is complete they dissolve the corporation. And then, if there is a problem with a house or a street, and the homeowner or neighborhood association sues, they will be suing a dissolved corporation with no assets. And the developer will move on to another project.
So Mitt Romney may have been right to suggest that people often benefit from corporations, but that does not make corporations people, my friends, any more than it makes a building a person.