CHAPTER XI

THE

USE OF THE BUSINESS CORPORATION

THE Corporation is today, without question, the favorite form of ownership organization in the United States for business establishments of moderate and large size. This preference was so noticeable among manufacturing establishments in 1909 that it was strongly commented upon in the Report on Manufactures of the Bureau of the Census in that year. This report says: "The most important distinction shown is that between corporate and all other forms of ownership. Of the total number of establishments reported as engaged in manufacturing industries in 1909, 25.9 per cent were under corporate ownership. The corresponding figure for 1904 was 23.6 per cent. While corporations thus controlled only about one-fourth of the total number of establishments, they gave employment to a large proportion of all wage earners reported, namely, 75.6 per cent in 1909 and 70.6 in 1904. The value of the products of the factories operated by corporations represented 79 per cent of the total value of products for all establishments in 1909 and 73.7 per cent in 1904. These figures show that even in this short period of five years the corporate form of ownership increased so greatly that it represented an appreciably larger proportion of the manufacturing interests of the country in 1909 than in 1904." But this growth in the use of the corporate form of ownership for manufacturing establishments, is still continuing. In 1914 the position of the corporation in this type of industry was 28.4 per cent of the number of establishments, 80.30 per 1 Thirteenth Census of the United States-Abstract (1909), p. 461.

cent of the total number of wage earners employed and 83.2 per cent of the total value of all products.

Nor is it in the manufacturing industries alone that the corporation is dominant. In mining, transportation and public utilities, and in finance it enjoys an equally eminent position. This is well shown by the following table compiled from the income tax returns for 1917.

NUMBER OF CORPORATIONS IN GIVEN INDUSTRIES COMPARED WITH NUMBER OF INDIVIDUALS REPORTING INCOME FROM THESE INDUSTRIES IN 1917 2

2 Prepared from Statistics of Income (1917) compiled by the Commissioner of Internal Revenue, U. S. Treasury Department.

Even the field of trade, that time-honored precinct of the individual merchant, is rapidly succumbing to this superior type of organization. Only in agriculture and related

industries and for personal service and the professions does it appear ill suited. There are, nevertheless, many large cattle ranches in the West, and dairying undertakings in the East operating as corporations. It is used but sparingly for personal service enterprises; and it is doubtful whether it can make much headway in the professions, for some of the states, including New York, bar it to the latter entirely.

While the census report, referred to above, ascribes this rapid growth in the use of the corporation primarily to the advantages that it affords in the matter of procuring capital, other factors also have stimulated it. These are of two classes: (1) Those inherent in the type of organization itself, which have already been described in a preceding chapter under advantages of the corporate form; and (2) external influences that favor it in one way or another.

These external forces arise for the most part out of the peculiarities of the present industrial system. Technical progress, for example, has made large-scale production possible by introducing machinery and factory methods into manufacture. But large scale production without an available market and a source of raw materials is of itself not practical. It does not become a factor in industrial organization until the means of communication and transportation have been brought into technical coördination, so that a wide market for finished products and an ample supply of raw materials may be reached. Commercial practices and aids in the nature of finance, extension of credit, etc., also are factors influencing the growth of business establishments. Big establishments then are the outstanding characteristic of modern industry, and since big establishments require large accumulations of capital they adopt a form of ownership organization that can meet this prime requirement with the greatest ease. This the corporation does admirably and with a mimimum of risk.

The policies adopted by the several states with regard to incorporation also, have by no means been negligible factors in promoting its more general use. The sale by state legislatures of special charters has practically ceased, but there still exists among a few of the several states a sort of keen competition to secure the charter-granting business of the country, which, because of the initial franchise tax, can be made very remunerative. It is needless to point out that such competition is conducted on the principle of giving the greatest benefits for the least cost. Consequently, these states encourage incorporation and stimulate it by adopting tax laws under which may be secured the broadest grant of powers with a minimum amount of restriction, control and onerous obligations. Some of the states that have set up "bargain counters over which to engage in the business of charter selling are New Jersey, Delaware, Maine and West Virginia. New Jersey, which until 1913, had been called the home of American monopolies, for some years preceding that date derived about 60 per cent of its annual revenue for state purposes from its corporation franchise tax-a tax which was no heavier or lighter than was to be found in a considerable number of states but which was gladly paid for holding company privileges and other advantages. The other three states also draw a substantial proportion of their funds from the same source. When, in 1913, New Jersey revamped her corporation laws making them less desirable from the standpoint of "big business," Delaware became its heir. This little state, with a population of but a few hundred thousand, during a single month - July, 1920— granted charters to corporations whose aggregate authorized capital stock reached the staggering sum of $1,350,000,000 representing 80 per cent of the nation's total for that month.

Even the Federal Income Tax Law of 1918 fosters incorporation by placing a heavier burden of taxes upon

other forms of ownership. Thus, in a letter to the Ways and Means Committee of the House of Representatives in Washington, (March 1920) Mr. Houston, the Secretary of the Treasury said: "In 1918 the members of a well-known partnership paid nearly $1,125,000 more taxes than they would have paid had their business been organized as a corporation."

So long as the corporation remains the favored type of organization for big business these influences will continue to make themselves felt. Big business demands advantages that the personal ownership types of organization do not offer, and to attain them it will not hesitate to influence legislation to secure the passage of laws under which it may most effectively carry out its operations and plans, whether these may or may not be for the best interests of the public. It is under the pressure of these demands that certain clearly defined types of corporations have been given the statutory sanction, under which they have been molded into shape by the exactions of economic conditions.

Types of Corporations. - Viewed from the standpoint of its structural arrangements, the business corporation exhibits two distinct types: (1) the simple corporation; and (2) the securities-holding corporation.

Where a corporation is authorized to carry on a business undertaking, but is not specifically granted the power to hold or acquire the securities of other corporations, it is a simple corporation. Under the English common law all business corporations are of this type; and under the statutes of most of the several states it is still considered to be the ordinary type. While this does not preclude the simple corporation from establishing certain intercorporate relations, such as interlocking directorates or a community of interest, it does preclude all arrangements whereby a relationship, giving to one corporation a claim to either