Example 5. A suit was brought to oust a corporation of its franchise to be a corporation on the ground that it had violated the law against trusts and monopolies. It defended that the alleged agreement to enter a trust was made by its members and not by it. Held: that it was a question of substance whether the corporation was in the trust or not and the form thereof would be ignored.8

(3) Corporation used to evade law.

That which the law forbids to be done by a person or corporation on the ground of public policy, cannot be accomplished by that person or corporation by the formation of a corporation for the purpose of evading that law.

Example 6. The Federal statute forbade a railroad company engaged in interstate commerce to carry articles owned, produced or mined by it, or in which it has a direct or indirect interest. It was charged that a railroad company was violating this act by owning stock in a coal corporation which it was using as a sham in order to evade the law. Held, that the railroad company was violating the law.9

(4) Corporation used to accomplish fraud.

If a corporation is formed or utilized to accomplish a fraud which though in form is the fraud of the corporation is in substance the fraud of its members or those who are making use of its agency, they will be held.

Example 7. A, being in the business of making investments, formed several corporations, all of which he owned

8. State ex rel. v. Standard Oil Co., 49 Ohio St. 137; see also People v. No. River Sugar Refining Co., 121 N. Y. 582, 9 L. R. A. 33, 24 N. E. 834.

9. U. S. v. Lehigh Valley R. Co., 220 U. S. 257.

and controlled, through the medium of which he invested for his clients in worthless securities. Held, that he was the real actor and liable for damages.10

Sec. 5. CORPORATIONS DISTINGUISHED FROM PARTNERSHIPS. A partnership is not a legal entity but a relationship growing out of a contract by individuals to conduct a business enterprise as the co-owners thereof, sharing the profits and losses.

A partnership is a combination of persons whose rights and liabilities are governed by a contract whereby they have agreed to mutually conduct a business as the coowners thereof, sharing the profits and losses. No separate individuality in the law is thereby created. A relationship, not an entity, has been established. The acts of the partnership are the acts of its members; its liability is their liability. Also, the partnership has no charter from the state; it arises by mere agreement between the parties.

If under such an arrangement corporation organization is copied and the capital stock is made a fixed amount and divided into transferable shares which are represented by certificates issued to the owners thereof, the concern is known as a "joint stock company." Such a concern, having no charter from the state, is still a partnership in all of its substantial legal aspects, and the liability arising is the liability of the members.11

Sec. 6. REASONS FOR THE INCORPORATION OF BUSINESS COMPANIES. The main reasons for the incorporation of companies are to secure limitation of personal lia

10. Donovan v. Purtell, 216 Ill. 629.

11. People v. Rose, 219 Ill. 46. In some states statutes have been in force regulating the legal status of such a concern, but organization thereunder has not been extensive.

bility, to effect a more permanent and systematic organization, and in cases, to secure funds or a better credit.

We may now consider those chief considerations which induce men to incorporate a business. We will notice in a later section 12 that it may not always be desirable to incorporate, yet in a great many cases, especially in large. businesses, the considerations in favor of incorporation outweigh those which are against it. Amplifying the black letter text, we may set forth a number of distinct considerations which lead parties to secure a charter.

(1) The liability of shareholders is limited to the amount of their subscriptions.

This indeed is the great reason, it may be assumed, why incorporation is desirable. For, under the laws of various states, with very few and narrow exceptions, the par value of the stock for which one subscribes represents the total amount that he may be called upon to pay either by the corporation or creditors of the corporation. When he has once paid that amount, his liability is gone; no further sum may be called for, no assessments may be voted against him, though all the other shareholders should join in the vote.13

In a partnership one's liability to creditors is personal and unlimited. Perhaps by agreement the other partners

12. See Section 9 post, also see discussion of Business Trusts, for benefit of organization in that form.

13. In a few states fully paid stock may be assessed in case of insolvency, and such is the fact under the Federal Bank Act and State Bank laws, but even under such laws a subscriber knows the limit for which he can be held even in case of insolvency. There have also been in some instances statutes permitting the organization of "full liability" corporations, but obviously such concerns would be rare.

have no right to call for more than a certain amount, but this does not affect creditors, who may out of the assets of any single partner collect their judgments, leaving such partner to reimbursement by his associates for their share of the debt, who, being absent or becoming insolvent, may not be responsible. If one deals with the firm of A, B, & C, he may know that his claims are collectible so long as any member of that firm remains solvent. But in a corporation, personal liability is eliminated and this is the great advantage of incorporation.

(2) The members of a corporation are not liable for the unauthorized acts of their associates.

There is a rule in the law of agency that a principal is not only responsible for the acts and contracts which he really authorized but for those also which he seems to have authorized. He will be made liable for all acts done and contracts made within the scope of the agent's apparent authority.

An agent has apparent authority to do all those things which one would reasonably expect an agent to have authority to do from the position in which the principal has placed him. A special agent has very limited authority, but an agent whose authority is of a general nature may be expected to have all the authority that is reasonably necessary to carry on the work which he is in charge ofsuch authority as persons in that situation usually have.

Consequently principals are often bound upon contracts made by agents which are entered into by the agent without any real authority or, perhaps, even against express instructions. If the agent seems from his position-the position in which the principal has placed him to have

authority, a third person is justified in believing that he has such authority.

Now it is true that this rule applies in its full force in respect to corporations, and the corporation may be bound by the acts of a general agent which are not within his real authority, but it is the corporation which is bound and not the shareholders. Now if one is conducting a business which is not incorporated he is conducting it as a partner or as sole owner. If he is in a partnership, each of his partners is a general agent of the others and as such, has a large apparent authority, and thus may bind the others upon acts which their own discretion would have forbidden. And if one is not a partner in a business, but the sole owner thereof, still be may have agents and servants to help him conduct it. But shareholders in a corporation are neither agents of the corporation nor of the other shareholders, and consequently neither the corporation nor the shareholders are responsible for the acts and contracts attempted to be made by the other shareholders as agents of the corporation unless there has been some special appointment whereby such shareholders became also agents.

It is likewise a law of agency that a principal is responsible for the torts of his agent or servant committed within the scope of the authority and this rule makes one whose business is unincorporated responsible for negligence, fraud and other torts of his agents and servants, and of his partners, if he have partners.

The incorporation of a company creates a new person who shall stand as the principal upon the contracts made in its name by its agent and for the torts of its agents and servants; and incorporation thus serves to limit liability in this respect.