There’s a lot of misconceptions out there about what corporations are, what limited liability is, and what role do governments have in a corporation. As an owner of a few types of corporations, hopefully I can explain.
The belief is that a corporation’s existence is enabled by governments, and that limited liability means corporations are protected from lawsuits. The general misconception is that corporations are government created entities, protected by governments (possibly in exchange for giving kickbacks to politicians). However, that’s not true in any way.
Historically, the way corporations were started in the first place was with voyages to the “New World,” the Americas. Investors would pool their money, draw up a contract for a voyage expedition, and use those resources to get a ship and hire a captain. The contract would state that should the voyage succeed, the profits would be divided proportionally based on how much each person invested. If the voyage failed, then they would only lose their investment. And if the voyage failed due to the captain’s negligence – he got drunk and ran the ship into another ship or port for example – only the captain would be liable for his actions.
And that’s all a corporation really is and always has been.
• Corporations don’t require a government to be formed. Just a contract between investors and managers.
• Limited Liability doesn’t mean that a corporation is protected from lawsuits. You can still sue the company, or the manager (captain) for any harm they do. The only thing Limited Liability means is that you can’t go after grandma’s house, just because her 401k mutual fund had shares of BP stock and BP spilled oil. Limited Liability just means that the liability – the amount that can be lost – is limited to the amount invested – the stock shares.
• With regards to how government is involved, the only thing governments determine is how income made by a corporation is treated, specifically to determine how it will get taxed. That’s it. There are no “special privileges” given to corporations outside of the very sensible legal treatment given to the contracts (going after managers while leaving grandma investor alone). But that legal treatment would be the same regardless of whether it’s done by government, private law, or even general socially accepted policy.
• As for taxation, corporations aren’t given special tax privileges, because despite being treated like a person for the sake of income and lawsuits, a corporation isn’t a person. Actual people, the investors, still have to get money out of it. And they are the ones who actually get taxed. So even though you might read something like “This corporation paid zero in taxes!” and reading that may make you angry, fact is *someone*, an actual person who invested in the corporation (such as that grandma with a 401k), got paid those profits, and they are the ones who pay taxes. In fact, raising corporate taxes does nothing but take money away from retirees and investors who would have gotten that money, and paid taxes on it anyway.
Plus increasing or decreasing corporate tax rates doesn’t actually increase or decrease how much big corporations pay in taxes anyway, but I’ll cover that in a different post.
So, despite there being a lot of hate propagated against corporations in the media and social circles, the truth is that they’re actually fairly benign. Nothing but a piece of paper with a contract on it, sitting in someone’s filling cabinet.