The Four Functions of Corporate Personhood

Abstract

In this article I argue that the legal device of creating separate juridical “persons” for certain business activities serves at least four functions that became especially important to business organizers during and after the industrial revolution, and that those functions are still important to most large, publicly-traded corporations. These are: 1) Providing continuity, and a clear line of succession in the holding of property and the carrying out of contracts. 2) Providing an “identifiable persona” to serve as a central actor in carrying out the business activity. Employees and investors in the enterprise, as well as customers of the enterprise, recognize, and perhaps identify with this persona, which serves as the bearer of important intangible assets such as goodwill, reputation and brand. This persona is the counterparty to all contracts that the corporation enters into with its various participants (employees, customers, suppliers, and investors), and can sue and be sued in its own name. 3) Providing a mechanism for separating pools of assets according to which assets are dedicated to the business, and which assets are the personal assets of the human persons who are participating in the business. The ability to partition assets in this way makes it easier to commit specialized assets to an enterprise, and lock those assets in so that they remain committed to the enterprise and can realize their full value (Blair, 2003; Hansmann and Kraakman, 2000). 4) The separateness of the corporate entity, once the corporation is created, requires a legal mechanism for self-governance, at least with respect to the undertakings of the entity. The governance structure prescribed by corporate law since the early 19th century is a managerial hierarchy topped by a board of directors that is distinct from shareholders, managers, and employees, and that has fiduciary duties to the corporation itself as well as to shareholders.

These four functions of entity status in corporations, all of which have been associated with the concept of corporate personhood, are important sources of value in organizing business activities that involve a substantial number of people using dedicated assets over long periods of time. All four of these functions have been important since the Industrial Revolution, and continue to be important in business activities today. In large corporations with many shareholders and ongoing business activities, the four functions come as a package and are connected to each other, although the corporate form can be deployed to achieve as few as one of these purposes. These functions would be very difficult, if not impossible, to accomplish using only transactional contracts.

Careful analysis of the functions of “personhood,” or “entity status” can shed light on policy questions about what Constitutional rights should be recognized for corporations.

Keywords: corporate personhood, corporate law, legal entity status, corporate history, nexus of contracts, shareholder primacy, asset partitioning, capital lock-in, team production, corporate charters, joint-stock companies, brands, board of directors, board governance, fiduciary duties