The main innovation that makes an industrial corporation distinct from other forms of organization is limited liability. If the business fails, or is punished for wrongdoing, the individual stockholders lose the value of their stock, but it stops there. Their other assets aren’t in danger.

That’s quite distinct from arrangements such as sole proprietorship or partnerships, in which all the assets of the participant(s) are within reach of the Law in case of business failure or misbehavior. It turns out to be an excellent way to collect capital investment. People who have wealth surplus to immediate requirements can put it into the Corporation; they might lose their investment, but the sheriff isn’t coming after their house or other assets.

It might seem unique, but it really isn’t. It’s the same arrangement (though elaborated somewhat) as for hiring mercenary soldiers!

When a Government hires mercenaries, it hires the Company through its Captain. It doesn’t hire the individual soldiers, and in fact has no direct authority over them so far as military discipline is concerned — if soldiers have to be punished the Government authority tells the Captain, who takes care of it. Actually, of course, the Captain tells a Lieutenant, who tells a Sergeant, who tells a Corporal to go hunt down the wrongdoer and flog him as necessary. The point is that it’s all within the Company; the Government’s people aren’t involved. If the whole Company fails, loses, or misbehaves, it’s the Captain who catches the flak, not the individual soldiers, though it’s going to be tough nails for them if the Company fails, because it leaves them as autonomous individuals with no protection from anybody.

Individual soldiers acting outside the purview of the Company and its contracted functions may or may not be liable for transgressions against the civil Law of that jurisdiction; that depends on the details of the hiring contract. It’s been done at both extremes, and lots of shadings between. In that case, though, the soldiers in question aren’t acting as part of the Company, they’re “on their own”, and in lots of cases the Captain will let the civil authorities do as they please, then punish the soldier again when he gets out of the clink.

A Company of soldiers gets a contract to do what the Government needs soldiers to accomplish. A Company of merchants or businessmen get a charter — which is a special form of “contract” with no expiration date, but still, at root, a contract — to do what the Government needs merchants to do. Individual soldiers aren’t directly liable for the Company’s actions; individual investors aren’t directly liable for the Corporation’s actions.

Thinking of GE or 3M as entirely independent entities leads to wrong conclusions, because if the premises are false the answers will be wrong even if the reasoning is impeccable. The analogy gets weaker as more and more details are added, but if, when you think of a Corporation, you think of a bunch of hairy guys in boiled-leather underwear carrying a lot of cutlery, hired by the Prince to conquer advertising or the car-building business, you’ll come a lot closer to getting the right answers.

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