Contracts of Promoters. IV. The Relation of Stockholders to the Corporation. V. VI. The Relation of Creditors to the Corporation. INTRODUCTION The law of private corporations is that branch of the law which prescribes the rights and liabilities and other relations of the various persons who may be interested in the conduct of a business organized in a particular way. The law of partnerships and of corporations taken together comprise what has been called the law. of business associations. The chapters devoted to the subject of partnership have shown what the relations of the partners are as between themselves and as to third parties under the normal circumstances which arise during the conduct of the business. The law of private corporations is similarly concerned with the establishment of a form of business organization which produces legal relations of different nature and extent. Surveying the broad outlines of the law of partnership, with a view of determining whether or not, in the light of particular situations, it is desirable to establish and conduct a business enterprise in this form, the following aspects of the partnership form of organization stand out rather distinctly: (1) Each partner is liable individually for the debts of the firm. (2) The interest of the individual partner in specific partnership property is not a subject of transfer. (3) The interest of a partner in the partnership that is, his interest in the profits and surplus-may be transferred by him. (4) The interest of each partner to participate in the management is not the subject of transfer. An individual partner cannot, therefore, transfer to another person all of the rights, privileges, and powers which he possesses. (4) The partnership relation is of an unstable nature. It may readily be dissolved. While a dissolution does not necessarily interrupt the continuance of the business, the risk that it may seriously cripple the business or terminate it is always present. These aspects of the partnership relation from a business standpoint may be regarded as disadvantageous. The economic reasons which have operated to produce the corporate form of business organization are to be found in the desire. to devise some method by which individuals may combine their resources for a common end without incurring these risks incident to the partnership relation. Specifically, the desire is to establish a form of organization which (1) eliminates the individual liability of each owner of the business for the debts of the business; (2) which enables an owner to transfer his entire interest with respect to the business, his property interest, his interest with respect to profits, and his privileges of participating in the management; and (3) which is not liable to interruption by the various acts which cause a dissolution of a partnership. The law of corporations accomplishes these objects. Obviously, a group of individuals should not, of their own will, be able to accomplish these results. The granting and exercise of special privileges, such as these, ought to be and are within the control of the state. A business possessing these incidents may not, therefore, be organized without the consent of the state. Individuals may secure these special privileges by a special act of the state Legislature, where the Constitution does not forbid, but it is much more common for the Legislature to enact a general law prescribing the method of organization of business enterprises. in the corporate form. It is common to speak of a corporation as though it were something separate and distinct from the members who compose it. It is referred to as an intangible thing, as an entity. It is convenient to so regard the corporation, and, when understood, simplifies the discussion of problems incident to the conduct of a business by individuals who by law possess these special privileges. But this convenient designation of a group of individuals as a legal entity should not blind one to the facts. Human beings conduct business. Business requires capital. Capital must be contributed by individuals. A contribution of capital does not mean its transfer to some other person necessarily. Nor may capital be contributed to an intangible thing. An individual conducting his own business contributes capital to that business by employing certain property belonging to him with particular objects in view. Where two or more persons combine their property for the purpose of using it with a view to profit, this merely means that they commingle it, sell it or permit it to be sold by others, or use it in the manufacture of goods for sale. These are physical acts. The legal effect to be given to them arises from the law. And so, where two or more persons desire to engage in business with limited liability, with full power of transferring their entire interest therein, and without incurring the risks that the business be terminated by the death of a member, a sale of the interest of a member, or otherwise, these privileges are conferred upon them by their compliance with the conditions established by law. After obtaining these privileges, it is common to speak of the broad legal effect of these facts as the organization of a corporation. If A., B., and C. organize a partnership and also a corporation, and conduct these two business enterprises in buildings side by side, the physical facts would appear very much alike; but the legal relations between A., B., and C., and between A., B., C. and third persons, would be very different, and sooner or later physical facts would arise because of the relations which, to a close observer, or even to a casual observer, would show that the two business organizations were different. The law of corporations is therefore taken up with the establishment of the legal relations between the parties so organized and the legal relations which may arise between those conducting the business and third persons. Just as in other branches of the law, the first question is to ascertain what facts will operate to confer upon individuals these special privileges. A statute authorizing the incorporation of business enterprises will provide that certain acts must be done as conditions precedent to the right to do business in the corporate form. Usually these formalities are relatively simple. The parties seeking incorporation must declare their intentions, state the purposes for which they desire a charter, give the names of certain interested parties, the amount of capital to be employed, the name and location of the proposed business, etc. In other words, the law will require the parties to make a fairly detailed disclosure of their intentions, and will usually require that this information be filed with some public officer, so that it will be open to the public. A subordinate problem, but nevertheless an important one, arises at this point. The law will not only prescribe what must be done before the parties may be said to be incorporated, but also the law must prescribe the effect of a failure to conform to these requirements. If the failures to comply with the statute were of the same kind and degree, the problem would not be a difficult one; but the various detailed requirements of a general incorporation act will not all be of the same importance. Consequently a failure to comply with some of the requirements may produce certain results, while a failure to comply with other requirements may produce quite different results. Having established what constitutes a corporation, the general problem thereafter is to determine the nature and extent of the relations of the parties who have so organized themselves, and to ascertain what their relations are to all other persons. Section CHAPTER I ORGANIZATION OF A CORPORATION 1. Effect of Complete Organization-The Corporate Entity. 2. When Corporate Entity may be Disregarded. 3. Effect of Incomplete Organization. SECTION 1.-EFFECT OF COMPLETE ORGANIZATION— THE CORPORATE ENTITY PEOPLE ex rel. NATIONAL EXP. CO. v. COLEMAN et al., Tax Commissioners. (Court of Appeals of New York, 1892. 133 N. Y. 279, 31 N. E. 96, 16 L. R. A. 183.) Proceedings on the relation of Lock W. Winchester, as treasurer of the National Express Company, to review the action of the tax commissioners in taxing the company on its capital stock as a corporation. From a judgment of the general term, affirming a judgment of the special term vacating the assessment, the commissioners appeal. FINCH, J. The relator was taxed upon its capital, on the ground that it had become a corporation, within the meaning of the provision of the Revised Statutes which enacts that "all moneyed or stock corporations deriving an income or profit from their capital, or otherwise, shall be liable to taxation on their capital in the manner hereinafter prescribed." 1 Rev. St. pt. 1, c. 13, tit. 4, § 1. The company was formed as a joint-stock company or association, in 1853, by a written agreement of eight individuals with each other, the whole force and effect of which, in constituting and creating the organization, rested upon the common-law rights of the individuals, and their power to contract with each other. The relation they assumed was wholly the product of their mutual agreement, and dependent in no respect upon the grant or authority of the state. There is no doubt, therefore, that, when the company was formed and went into operation, the law recognized a distinction and substantial difference between joint-stock companies and corporations, and never confused one with the other; and that the existing statute which taxed the capital of corporations had no reference to or operation upon joint-stock companies or associations. But two things have since occurred. The legislature, while steadily preserving the distinction of names, has, with equal persistence, confused the things, by obliterating substantial and characteristic marks of difference; until it is now claimed that the joint-stock associations have grown into and become corporations by force of the continued bestowal upon them of corporate attributes. It is said, and very probably correctly said, that the legislature may create a corporation without explicitly declaring it to be such, by the bestowal of a corporate franchise or corporate attributes, and the cases of banking associations are referred to as instances of actual occurrence. * It is added that such result may happen even without the legislative intent, and because the gift of corporate powers and attributes is tantamount to a corporate creation. It is then asserted that a series of statutes, beginning with the act of 1849, has ended in the gift to jointstock associations of every essential attribute possessed by and characteristic of corporations (Laws 1853, c. 53; Laws 1854, c. 245; Laws 1867, c. 289); that the lines of distinction between the two, however far apart in the beginning, have steadily converged, until they have melted into each other and become identical; that every distinguishing mark and characteristic has been obliterated; and no reason remains why joint-stock associations should not be, in all respects, treated and regarded as corporations. Some of this contention is true. The case of People v. Wemple, 117 N. Y. 136, 22 N. E. 1046, 6 L. R. A. 303, shows very forcibly how almost the full measure of corporate attributes has, by legislative enactment, been bestowed upon joint-stock associations, until the difference, if there be one, is obscure, elusive, and difficult to see and describe. And yet the truth remains that all along the line of legislation the distinctive names have been retained as indicative and representative of a difference in the organizations themselves. * * * This persistent distinction in the language of the statutes I should not be inclined to disregard or treat as of no practical consequence, when seeking to arrive at the true intent and proper construction of the statute, even if I were unable to discover any practical or substantial difference between the two classes of organizations upon which it could rest or out of which it grew; for the distinction so sedulously and persistently observed would strongly.indicate the legislative intent, and so the correct construction. But I think there was an original and inherent difference between the corporate and joint-stock companies, known to our law, which legislation has somewhat obscured, but has not destroyed, and that difference is the one pointed out by the learned counsel for the respondent, and which impresses me as logical, and well supported by authority. It is that the creation of the corporation merges in the artificial body and drowns in it the individual rights and liabilities of the members, while the organization of a joint-stock company leaves the individual rights and liabilities unimpaired and in full force. The idea was expressed in Supervisors of Niagara v. People, 7 Hill, 512, and in Gifford v. Livingston, 2 Denio, 380, by the statement that the corporators lost their individuality, and merged their individual characters into one artificial existence; and upon these authorities a corporation is defined, on behalf of the respondents, to be "an artificial person created by the sovereign from natural persons, and in which artificial person the natural persons of which it is composed become merged and nonexistent." I am conscious that legal definitions invite and provoke criticism, because the instances are rare in which they prove to be perfectly accurate; and yet this one offered to us may be accepted, if it successfully bears some sufficient test. In putting it on trial, we may take the nature of the individual liability of the corporators on the one hand, and of the associates on the other, for the debts contracted by their respective organizations, as a sufficient test of the difference between them, and contrast their nature and character. It is an essential and inherent characteristic of a corporation that it alone is primarily liable for its debts, because it alone contracts them, except as |