THE CORPORATION, A PRELIMINARY SKETCH 1. Scope of corporation finance.—Corporation finance, as distinguished from other branches of finance, relates to the methods and policies involved in securing capital and managing the finances of in corporated business enterprises. A simple example will serve to illustrate the scope of the sub j ect.
When an individual desires to extend his business more rapidly than his earnings or means will permit, he can do so by borrowing or by taking in a moneyed partner, who will thereafter share with him the risk, management and profits of the business.
If these partners later desire to extend their ac tivities beyond their own resources, they may do so by borrowing, or by admitting other new partners who will bring in additional capital, and who, like the original partners, will share the risk, management and income of the enterprise. But there are, generally speaking, rather definite limits to the expansion of partnerships thru the admission of new members. Each partner participates in the management and as sumes full secondary liability for the debts of the con cern beyond his own share, thereby guaranteeing credi tors against the incompetence or dishonesty of his associates. Furthermore, the life of a partnership is limited by the life of each individual partner and by the terms of the partnership agreement. New part ners cannot be admitted or old ones dropped without unanimous consent. Under such conditions men will not freely invest capital. Obviously, if the business under discussion expands further, some form of or ganizatiop other than the partnership will be required to interest new capital.
The next expansion will call for incorporating.the enterprise under a charter from the state. Here for the first time corporation finance enters this business. The new association is a corporation and the right to participate in the control, risk, income and assets of the business is called capital stock. The members are stockholders, with rights in the company proportioned to their respective holdings. To obtain capital for the company by the sale of stock or by borrowing, in volves corporation finance. The management of the business is now delegated by the stockholders to a board of directors and, with the proper legal sanction, the capital of the enterprise may be indefinitely ex panded by the sale of new shares whenever funds are needed and investors can be found to buy them.
In changing the form of the business from indi vidual ownership to partnership, and from partner ship to corporation, no vital changes are necessary in the methods of buying, producing, selling, shipping, billing or collecting from customers. The form of association does not necessarily alter the manner of conducting the current operations involved in pro duction and distribution, and corporation finance does not deal with them, except incidentally.
But it should be noted that the methods of raising additional capital are entirely changed in converting the enterprise from a partnership to a corporation. Partners are associated personally on a basis of mu tual confidence; stockholders may be entire strangers, not acquainted with the business, and it takes great skill to interest them to the extent of investing capital in it.
To finance an enterprise means to provide the cap ital necessary to begin and maintain its operations. Corporation finance, therefore, relates only to the as sembling of capital thru the sale of corporate secur ities—stocks,' bonds and notes—and to matters of financial policy affecting the distribution of control, risk and income among the holders of such securities.
2. Nature of a hundred years a fro Chief Justice Marshall of the United States Supreme Court, defined a corporation as "an arti ficial being, invisible, intangible, and existing only in contemplation of law." This definition conveys the essential fact that a corporation is not a natural person, but a separate legal entity, to which the law assigns a perpetual or continuous existence, independ ent of the lives of the persons composing it. The stockholders, in their collective capacity, compose the corporation, but it is governed by duly appointed di rectors and officers. The company, as an artificial person, cannot exist or act, except thru human agency. Like natural persons, it must be held responsible for wrongful acts and omissions. The law therefore holds its officers, directors and stockholders respon sible for the misdeeds of the corporation and visits upon them appropriate punishment for corporate offenses.