What is the legal basis of a corporation under capitalism?

A corporation (trust) is a group of individuals that form a voluntary, contractual association, or trust, under a fictional name in order to be recognized as a single legal entity (typically for limited liability of the corporation’s shareholders).

The purpose of the corporation (whether business, religious, political, etc.) and the terms between all individuals in the association are contractually spelled out in the corporation’s charter.

Under capitalism, a corporation is a group of individuals organized in a specific form (as spelled out in a corporation’s charter.). Similarly, a government is a group of individuals organized in a specific form (as spelled out in a government’s constitution.) Similarly, a marriage is a group of individuals (a man and a woman traditionally) organized in a specific form (as spelled out in the marriage agreement).

The basis of all such associations (whether a corporation, government, labor union, or marriage, etc.) are the inalienable right of its members to form contracts and associate with others free from private or state coercion.

Isn’t a corporation a legal fiction created by government?

Whether a corporation is a “legal fiction” depends on the meaning assigned to the term. As the term is used by anti-capitalists, “legal-fiction” is construed to mean that the owners and managers of a business entity become rightless serfs once they have assumed corporate status.

Under capitalism, the name of a corporation is made up (fictional), but the charter underlying the corporation is protected by right.

A marriage may have a legal framework behind it: this does not make it fictional. The same principle applies to the concept of society, and the same goes for a corporation where real individuals organize together under a fictional (i.e., made up ) name.

How are the laws governing corporations formed under capitalism?

The laws underlying corporations are based on the principle of individual rights. That is, the basis of a corporation are the rights of the individuals who form it. Rights are not fictional, and neither are the laws that a corporation must abide by. These laws are neither intrinsic, nor are they subjective and a matter of whim: they are objective facts that must be discovered (deduced from the basic principles while inducing the relevant facts) within a framework of rights.

The laws governing a corporation are the standardization and explicit recognition of the application of individual rights by the government. The laws protecting the right to free speech are not “legal fictions” created by the government but are laws based on this right. For example, if I can sell you a good, under the condition of “limited liability” — well so can a corporation. If it is illegal for me to pollute your home (pollution being a violation of rights), then so iis it illegal for the corporation.

Isn’t the right to form a corporation, a privilege that can be revoked at whim by the state?

The basis of treating a group of individuals who form a corporation as a single entity is the rights of the individuals who make up the corporation. In this case, this encompasses the rights of the shareholders, the rights of the corporate officers, the rights of the employees (management and workers.), and the rights of all individuals who choose to trade with that corporation under the terms of the corporate agreement.

The rights of a corporation are not a “privilege” as socialists allege. A corporation is a business enterprise (a collective entity) based on a complex legal contractual framework (based on the principle of individual rights) to deal with the problem of limiting liability regarding enterprises where there is a separation of management and ownership.

The definition of a corporation as “An artificial person or legal entity created by or under the authority of the laws of a state” (Black’s Law Dictionary) is only valid when one understands that the laws of any proper society are based on the principle of rights. The point is that the state has no authority to violate rights.

However, how can you treat a group of producers and traders as a single entity?

The same way one can treat a husband and wife as a single entity, as in a marriage. Or, the same way that one can treat a group of men (gender neutral usage) as a single entity called “society.”

The point to keep in mind is that all laws under capitalism are the application of the principle of individual rights to various circumstances.

What is the foundation of a corporation?

The foundation of a corporation are the rights of its members: the right to state that one is entering trade agreements under the presumption of limited liability (for the shareholders), under a corporate “assumed” name. All the rights of a corporation are derived from those of its members; as such, an individual neither gains nor loses rights in their capacity as members of a corporation. They are simply stating the terms of dealing with the business enterprise upfront.

What is government’s role in regard to corporations?

Government’s job is not to regulate corporations and manage their affairs as a dictator, but to protect their rights as a referee. Government’s job is to treat a corporation no different than any other citizen, granting it no special favors (corporate welfare is just as wrong as non-corporate welfare) or special punishments.

My concern, loudly echoed by anti-capitalists, is that to limit liability is to limit responsibility?

The limits of liability are not to hold shareholders (who have no control over the actions of the company) liable for acts of company employees — other than for what they invested in the company. Limited liability means that only the assets of the corporation are held up as “collateral” for its liabilities.

It would be ludicrous to hold all the savings of an 80-year grandmother who invested $100 in a poorly run corporation–which would be the case if she were in a partnership. Limited liability means that only that $100 of the grandmother is liable, and all her other assets not invested in that corporation – as a shareholder — are not held liable. 

Limited liability means that the shareholders are not responsible for the decisions that they do not make — only corporate officers, managers, and employees are liable to the extent that they make them.

What are the problems in the legal framework of today’s corporations?

There are some problems with corporations — the idea that they are government created “fictional” entities as opposed to the application of individual rights to an agreement between a group of individuals who decide to do business as a single entity under a fictional name, i.e. ‘trust.’

The problem is not corporations themselves, but the philosophical foundation underlying the legal status of corporations.

What is Insider Trading?

Under the principles of agency law, firms may use “inside” information as employee compensation; or the company through its bylaws can restrict its use (only then can “insider trading” be punished by owners as a breach of a contractual obligation).

In today’s division-of-labor society, it is inevitable that some individuals will discover and act on information before (and better than) others do. Such differences are the consequence of the fact that the human mind is individual by nature. Just as there’s no such thing as a “collective mind,” there is no such thing as “collective information.”

To grasp information an individual must expend effort; he must either create the information or discover it. After he does this, he may well choose to trade it with others or give it away in some act of charity (just as he may do with his tangible assets). However, he should not be obligated (nor compelled by law) to do these things. Morally, he does not “owe” his knowledge to anyone. The primary moral obligation rests on others: they should be obliged to keep their hands off such assets and not destroy or steal them (or hire the government to do so).

Contrary to the dogma preached by the SEC, “inside” information does not “belong” to the “public” — or to the government. If that were the case, we would have public ownership of the means of production (socialism) — because in today’s “information economy,” information is a crucial means to production.

“Inside” information about any company — its trade secrets, strategies — are assets that belong to shareholders (and to shareholding-executives too, if other shareholders approve of such a policy). Only a firm’s owners have the moral right to decide how their employees can use such information. Government-bureaucrats should have no say in the matter as no fraud is involved—and as long as a firm discloses its insider-information policy, no fraud is involved.

Under the principles of agency law, firms may use “inside” information as employee compensation; or the company through its bylaws can restrict its use (only then can “insider trading” be punished by owners as a breach of a contractual obligation). In a free-market, investors choose the kinds of companies they want to invest in (rather than have the SEC choose for them): a company which allows insider trading, or a company that prohibits it, or a company somewhere in-between.

At the root of the claim that the creators of knowledge and wealth owe it to the non-creators is the anti-American, ethical code of altruism — of allegedly-noble self-sacrifice. In Marxist terms, this means that wealth and information must be plundered “from each according to his ability” and distributed “to each according to his needs.” The producer has the ability, i.e., “greed”—the “public” has a need—the inalienable rights of the producer be damned.

“Insider trading” is a victimless crime. It is an innocent act that should be legal. However, worse than being a victimless crime, “insider trading” is a crime that has never been defined in law. (1) Thus, even though “it” is illegal, there is no real way to know if one has engaged in “it.” This permits regulators to persecute whomever they wish – at any time – for whatever reason they choose. To face jail time for an undefined crime is characteristic of a dictatorship – not a free society. There are legitimate laws against securities fraud – but, “insider” trading is not fraud. The government should prosecute fraud, but only by an objective, legal process in a court of law—and not an arbitrary, back-room regulatory process by a “rule of politicians.”

(1) “Section 10 of the Securities Exchange Act of 1934 broadly outlawed stock fraud. Eight years later the SEC adopted Rule 10b-5, making the fraud provisions applicable to purchases as well as sales of securities. Section 10 and Rule 10b-5 became crucial to the prosecution of illegal insider trading. Neither defines it, however.” (“Whispers Inside; Thunder Outside: A New Hunt Is On For Insider Trading,” The New York Times, June 30, 2002, Section 3, pp. 1&14;).