Many today do not realize how much our modern financial and business system depends on an ancient creation – the liability-limiting corporation. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347. One of the earliest English joint-stock companies was the East India Company (also known as the East India Trading Company, English East India Company, or the British East India Company), which was chartered by Elizabeth I in 1600. However, it was not until the enactment of the Limited Liability Act of 1855 that publicly owned corporations in Great Britain gave their stockholders protection from liability for the debts of the corporation.
In the United States, legislators of the various states retained a tight rein on corporations for 100 years after the American Revolution. Initially, corporate charters were limited to purposes that benefited the public, such as construction of roads or canals. The powers of corporations were also limited by the states, which often forbade corporations to own stock in other corporations, or own any property not directly connected to the corporation’s chartered purpose. The concept of today’s modern corporation – charted to engage in “any lawful business” was absent. It was not until the 1886 U.S. Supreme Court case of Santa Clara County v. Southern Pacific Railroad Company that the modern concept of a corporation as a separate legal entity took root in the United States.
So what does that have to do with me, you ask? If you are a business owner, it may be the difference between a bad business year and total financial ruin.
Many business owners do not realize the benefits of incorporation, or other forms of liability-limiting business formation. Many a sole proprietor has learned too late that the business’s debts are his/her debts, and failure of the business means the owners’ assets may be seized by creditors to pay the debts of the business. More than 124 years after the Santa Clara County v. Southern Pacific Railroad case, too many business owners risk their personal fortunes by trusting in archaic business forms such as the sole proprietorship or the general partnership, when a limited partnership, corporation or limited liability company might cost little, but protect much.
There is an old saying in equity – “The law does not favor the one who sleeps on his rights.” The law also does not favor the man or woman who is ignorant of their rights and the risks inherent in business. Educate yourself, or you may get a rough lesson from your creditors.
Lee Keller King
Senior Associate at The Vethan Law Firm