Types of Corporations: adjust the law to reality

Solution #3, for social and profit motives

Copyright 2009, John Manimas Medeiros

History, which changes everything, has changed the meaning and functions of business corporations. The modern corporation was evolving through practical business practices as early as the thirteenth century, in Arab-governed Cordoba, Spain. The early Muslims, the Caliphate that governed in Spain, achieved something that was missing from most of Europe, a reconciliation of science and religion. The Arabs were committed to Islam, but they were also committed to science. Wherever they found scientific facts or scientific methods or a scientific philosophy in ancient manuscripts (Greek, Alexandrian, Egyptian, Hebrew, Coptic, Persian, etc.) they made an effort to translate and mine the ancient store of knowledge for all that could be used. This pattern of behavior was continued by the revolutionaries of the Renaissance in Italy and France, which later spread to other parts of Europe. But this was not a smooth or peaceful development. The Christian Church, until 1517 being strictly the Roman Catholic Church, did not practice a reconciliation, or even a peaceful relationship between science and religion. The Church had to be the supreme authority, and any conflicting scientific ideas produced social, political and legal conflict. During this period of the late Middle Ages and the rise of science in Europe that we call the Renaissance, governments noticed that society could lose the benefits of a successful business entity - a scientific enterprise - with the passing of the founders or managers. Mining, shipping, the arts and crafts that sustained society, including agriculture, were all successful due to the knowledge and skills of people. Society had to pass both on to the next generation, and much of the value of knowledge and experience was lost when the old died and where replaced with the young. Without citing historical details here, it is clear that European society gradually grew to appreciate the concept that became the corporation. That concept is of course that a business entity, a group of people organized to provide some public good, such as plantation farming, fishing, building ships, building wagons, stone masonry, or any form of specialized craft such as silver smith or gold smith or iron smith, could serve society’s needs better if the business identity had a life of its own and were treated legally as though it were a person that never died. In this way all of the knowledge and experience, trade secrets and later patents and industrial property of all kinds, could be preserved and brought forward indefinitely even though the persons who master those skills and knowledge in a single lifetime pass away. By means of “incorporation” a business and the ability to conduct it are handed forward perpetually, for the greater good of the business community and for the greater good of society. Thus, the corporation was born, like most human institutions, from valid good intentions.

Searching for the history of the corporation is likely to result in formulations of history that address the "modern" corporation, or the business corporation fully formed or almost fully formed as we know it today. It is common to attribute the beginning of the modern business corporation with the British East India Company (1600). Soon after East India, other English, Dutch and French corporations were formed for the purpose of colonizing North America. A common arrangement was incorporation of a "plantation" for the purpose of producing and or harvesting raw materials, such as the large "king's pines" of New England that were desired for the masts of sailing ships. The original name for the State of Rhode Island is "Providence Plantations." The Plymouth Colony was Plymouth Plantation, and it nearly failed but was saved by Native Americans who taught the inept colonists how to grow corn. Some historians describe the origin of the business corporation as a primary tool, together with armed forces, of European governments to control international trade and colonize foreign lands. This is probably valid, but to be understood objectively one must take into consideration the longer history of Europe, which for centuries was subject to the control of international trade by governments in the Far East and Middle East. During the colonial era, the Europeans believed that they were acting in defense of their economic life and to reverse a past history of being "walled out" of international commerce by Eastern tyrants.

History changes everything, and the good inherent in business incorporation has become complicated and corrupted, again as occurs with most human institutions over time. The modern corporation played a major role, probably the major role in what we call the “industrial revolution.” This industrial revolution should probably be called the “mechanical” revolution because its true character and economic process is embodied in the manufacture and operation of machines to perform labor previously performed by human workers. This is why we casually refer to a machine as a “labor-saving device.” It reduces the requirements of human labor in a particular manufacturing or business process, but it also involves the use of mechanized energy, first water power and animal power (a horse on a treadmill) and then steam power and later electrical power produced by burning of fossil fuels, or driven by hydroelectric dams, and then later by nuclear power. All this may seem painfully familiar, the material of elementary social studies class in school. However, no matter how much we review the mechanical revolution in school and in college, we never seem to be fully aware of what we have done. The obvious problem that persists over time, no matter how scientific we think we are, is that we continue to deny that we are a part of the Nature we devour and reshape and we depend upon Nature for life.

Since the modern corporation shaped the American economy in the nineteenth century, the twentieth century saw the corporation become destructive of important social values. Originally, every business entity was started to meet a human need, provide something good for society, and those inventors or entrepreneurs who provided such an economic benefit, such as a less expensive pair of shoes, a better bicycle, a motor car, a light bulb, tougher fabrics, a machine that washes clothes, a radio, a new medicine, and so forth, could be compensated by “profits” for their special contribution to the health, comfort and progress of society. This was good, and still is good, but something else developed along the way. The concept of “capital” which originally meant machines and land and buildings and cash that were necessary for the operations of the corporation, became equated with money. To start a business, one needed and still needs money, money to pay for all that is necessary to get the business underway and begin making a profit. This brought to the forefront the concept of the investor, the one who has money and wants to do something good and productive with it, and make it grow, earn interest, or dividends, earn a profit. So the investor can be motivated by different desires, ranging from altruistic to extremely selfish. The investor can be looking for a bright medical doctor and chemist who have invented a new medicine, for example, to cure polio (actually a vaccine, of course). Or, someone who lost a family member in an auto accident might feel very strongly they would like to put their money to use making a device that makes automobiles safer. Or, a person who is conscious of certain foods being lost to decay or a loss of nutrients before reaching the consumer might want to invest in improvements in the food industry or the preservation and distribution of foods. While these possible motivations might seem strange to some readers (who think making a profit is the only motive), a study of the economic history of the United States would reveal to any student that most of the time the original motive behind a new business enterprise was to provide a public benefit and not only to make a profit. The profit is needed to stay in business, but that does not mean that profit was the original motive. Breakfast cereals, canned foods, frozen foods, refrigerators, dehydrated foods, diesel engines, even soft drinks began with a desire to improve the health, comfort and safety of people. The concept that business entities exist strictly to make a profit is not only unhealthy, it is economically invalid. A business that does not meet a human need or desire is not good for either purpose: not good to meet a human need; and not good to make a profit. Investors there are whose main goal is to make a profit, and so they seek a profitable business to give their money to, on the promise or expectation of a profit. That is okay. We do not need to discredit or disparage ordinary human selfishness. We would not be here if we did not all have some instinct to pursue our own self interests. But, what has happened during the twentieth century is that the business corporations have grown larger, too large most would agree, to be only a benefit for society. The large corporation has become a political entity with both political and economic power that rivals the power of the people and the civil government. For many who manage large corporations, the purpose of making a profit, even if making a profit requires hurting people - such as by raiding retirement funds or laying off thousands of workers - is the true and primary purpose for the existence of the corporation. What has actually come to pass is that corporations are sold and redefined, terminated by bankruptcy or just plain destroyed in order to produce profits for investors. Investors have come to be the managers of the corporation, and they often direct the affairs of the corporation toward the goal of profit at any cost, and that often means at any cost to society.

Clearly, both in the twentieth century and twenty-first, the proper way to cope with the powers of corporations, and the risks involved in allowing too much of the profit motive to control business activities, is an ongoing challenge to our government and our society. We still like what large corporations can do, such as build rockets and fantastic weapons and communications devices and fast foods and an endless list of toys that people use to entertain themselves and lose hours and days and years of their lives doing nothing that appears to be something. And at the same time, they are killing us. The large corporations are poisoning our foods, putting risky chemical compounds in everything we touch, producing pollutants that can damage the environment for decades before we discover the damage. The corporation has become a double-edged sword with razor sharpness. We want the products of the mechanical revolution, and the electro-mechanical revolution, and the electronic and chemical revolutions, but we don’t want to destroy ourselves in a manufactured flood of toxic waste. And we don’t want corporate executives to be so powerful that they are the true government making decisions for us and depriving us of the democratic process we believe we must have. So, this is where we are, and what can we do about it?

We can redefine the corporation legally to put some limits on it and provide some automatic restrictions on the power and purposes of business corporations.

The non-profit type of corporation already exists and I do not suggest any changes to the laws governing non-profit corporations at this time. The only suggestion I might make, which others have made, is that certain types of public service and or public utility corporations should be encouraged or required to be non-profit in form, such as hospitals or public utilities.

PART 1: Create two types of for-profit corporations: The problem that has developed that we would label the problem of "big corporations" does not arise from only the size and financial scope of corporations, but the rules that govern them. What we should do is change the rules for all corporations and create new sets of rules for two types of private business corporations:

1) The (traditional) for profit only corporation (Inc., Ltd, etc.);

2) The private social alliance corporation, IncSA.

Proposed rules for: 1) The (traditional) for profit only corporation (Inc., Ltd, etc.):

For the first type, the for profit only corporation, my strongest recommendations are that the rules be changed to more closely monitor all such corporations for illegal activity that impacts the business community and the society, specifically:

A) One hundred year renewable period of incorporation;

B) Status of legal incorporation suspended or withdrawn for specified unethical or otherwise deceptive business or accounting practices;

C) Regulations by government restricted to public safety and public health restrictions, such as toys and other products for children, food safety, dangers and risks to the environment inherent in toxins and other manufactured chemicals that affect food, soil and water, and any other factor that presents an impact on public health or safety;

D) Regulations by government the same or similar to established regulations with regard to securities and stocks and investment practices;

E) A NEW set of regulations that strictly prohibits any government business involvement with this type of for-profit-only corporation. This means that the government would not make any loans or grants of any form to this type of corporation. This type of corporation would never be hired by government to produce a product for the government or to conduct research and research and development of interest to the government. Government would never be involved in training employees or prospective employees or paying for such training. The rationale here is a direct and strong response to the incessant complaints from vicious and self-interested capitalists who publicly state that they are opposed to government regulation but then want the taxpayers to pay for their failures, their pollution, and pay huge sums of money to keep them in business after they have destroyed themselves with poor business practices or with criminal or unethical behavior. The sharp point of such NEW policy is that the for-profit-only corporation is on their own financially. The taxpayers are fed up and it no longer matters what you manufacture or how many people you employ. If you fail due to your selfish or stupid business practices, or financial manipulations, or criminal or unethical behavior of management or directors, you die. That's it. We, the taxpayers are simply not interested. Your parts will be sold and your previous functions will be taken over by other business people and other business entities.

Proposed rules for 2) The private social alliance corporation, IncSA:

A) One hundred year renewable period of incorporation;

B) Status of legal incorporation suspended or withdrawn for specified unethical or otherwise deceptive business or accounting practices;

C) Regulations by government NOT restricted to public safety and public health restrictions, such as toys and other products for children, food safety, dangers and risks to the environment inherent in toxins and other manufactured chemicals that affect food, soil and water, and any other factor that presents an impact on public health or safety;

D) Regulations by government the same or similar to established regulations with regard to securities and stocks and investment practices;

E) A NEW set of regulations that define the form or forms of social alliances that can exist between a corporation that exists not only for profit but also to meet a public need or human need, and wants to maintain a mutually supportive and mutually controlling relationship with the public and taxpayers they serve through private business enterprise. This is called a "social" alliance while it is in many ways a "business" alliance, but a business alliance for social purposes. The social alliance means that this type of corporation actively maintains policies that support the concept of corporations existing to meet the needs of citizens and consumers and not for profit only. There are several factors and practices that would or should be included in the regulations of the social alliance corporation:

1) Government plays a role in identifying prospective employees and training, possibly paying for training in whole or in part;

2) Government takes an appropriate interest, depending on the specific business services or products, in research and development;

3) Government may hire this type of corporation, purchase its products or services, or contract for research and development;

4) Workers exercise a clearly enforced right to belong to a labor union;

5) Government may recommend or actively support decisions regarding the size of the labor force. Government is involved in decision-making and planning when significant reductions in the labor force are deemed necessary, toward the purpose of minimizing negative impacts on employees and their dependents;

6) Government may contribute to the costs of operation or invest in the corporation, or be involved in the investment strategies used to support the business and assure success;

7) Government provides for mediation and conflict resolution services for all forms of disputes or disagreements that may arise from the conduct of business;

8) Government employees may audit corporate business meetings or conferences and corporation employees may audit any government meetings or conferences that are likely to have an impact on the corporation business;

9) Allowable profit margins may be defined by government so long as having such restrictions or not having such restrictions for categories of SA corporations or for specific SA corporations is clearly supported by the public.

It is obvious that under this proposed system of three types of corporations, any corporation in the defense industry could not be for-profit-only, and that is reasonable and consistent with the national interest and any reasonable definition of the public interest. War should not be profitable, but those who produce products that protect the nation's security should make a reasonable profit for meeting this particular human need. Many types of businesses would seem to fall within the social alliance type, such as hospitals and food producers; and others clearly fall within the for-profit-only type, such as gambling casinos and manufacture of luxury products. Actually, when one thinks about this proposed "division" of corporations, it becomes clear that it is like creating a new economic system that allows people in business to choose either "capitalism" or "socialism" without being penalized for either choice. Any business enterprise that produces a product or service that falls within basic human needs would naturally fit better into the social alliance type, while any business enterprise that produces a product or service that is clearly a luxury, or that is well beyond basic human needs, would naturally fit better into the for-profit-only type. Still, many corporations would appear to be able to function in either category, depending on the preferences of the controlling shareholders. Also, there would need to be some transitional legislation to define and describe how we would make the change, within a relatively short but reasonable transition period, from our current system to this proposed system that gives the public, through their elected government, more control over the businesses that exist to meet human needs and not only for profit.

Our current system of having only one type of business corporation, that is incorporated forever without any enforceable penalties for unethical or criminal behavior on the part of management, is not working in the public interest. White collar crime is notoriously destructive, often even subversive of the national economy, but results in light sentences or meaningless fines or gets no serious consequences at all. Some corporations are described as "too big to fail." I would argue that this is a designation that condemns our economic system, because if a corporation is really "too big to fail," then it is exercising a control over public policy that is contrary to democratic principles. We are supposed to be governed by the people, not by the people with money. The excessive influence of a corporate and financial oligarchy is far more destructive of our democratic process than any threat from foreign nations or external forces. This problem requires that we re-structure our economic system and substantially remove this excessive control in the hands of people who have demonstrated a capacity for selfishness and stupidity on a cosmic level.


1) Change tax law to treat capital gains same as earned income from self-employment; treat investment as form of legal gambling;

2) Severe penalties for white collar crime, designated as subversion of the economy.

3) Assign controlling powers of the Federal Reserve, such as interest rates and production of money, to the Secretary of the Treasury, with close Congressional control, not just "oversight."

1) Change tax law to treat capital gains same as earned income from self-employment; treat investment as form of legal gambling (which it is).

Capital gains income should be categorized and treated differently by virtue of the different sources of a capital gain. A capital gain from sale of a primary residence, or motor vehicle, or small pleasure boat, should be treated differently from the ongoing capital gains of a person who regularly buys and sells stocks -- for themselves and for others -- and uses their income from capital investments (or any part of it that is greater than $10,000 a year) as the earned income that they use to support themselves and their family. This type of "capital gain" should be re-designated as self-employment investment income, and be deemed to be the earned income of a self-employed investor, even if they are also employed by an investment company. Their tax rates should be the same as for any other self-employment income, and they should also be required to pay the self-employment tax the same as anyone else. There should be no other adjustments to "capital gains" taxes in this earned income category.

2) Severe penalties for white collar crime, designated as "subversion of the economy":

Unethical accounting practices and violations of laws by accountants and the managers or officers or trustees of a corporation should result in criminal penalties similar to the criminal penalties for murder and arson. White collar crimes need to be re-designated as a form of economic treason, subversion of the economy. Laundering money, illegal investments, insider trading, filing for bankruptcy in order to raid retirement funds and lay off older workers, should all be treated as subversion of the economy, and those who commit such crimes should be prohibited from owning or running any form of business for the remainder of their lives.

3) Assign controlling powers of the Federal Reserve, such as interest rates and production of money, to the Secretary of the Treasury, with close Congressional control, not just "oversight."

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