Saturday, July 14, 2012

Corporations: People, Entities, or a Hybrid of Both?

Many liberals have made a lot out of the Citizens United decision by the Supreme Court, which they describe as saying "corporations are people." However, the Supreme Court ruling doesn't actually use this terminology, even if the spirit of the ruling does imply that .

Still, one of the major elements of the campaign is the degree to which corporations deserve special considerations and what types of considerations those are. While both political sides of the debate tackle this argument with a lot of preconceptions, I think it's possible to really look at the facts behind how corporations are formed to understand the degree to which a corporation, in general, can be viewed as equivalent to an individual.

Mitt Romney's Evolving View of Corporate Personhood

Mitt Romney did use these words on the campaign trail during the Republican primary, when he replied to a critic at an event, "Corporations are people, my friend." He has been very vocal about his strong beliefs regarding the importance of corporate rights. I'm in the process of reading Romney's jobs plan, Believe in America: Mitt Romney's Plan for Jobs and Economic Growth (available on the Kindle). In it, he (or his team, at least) says the following:
The truth is, as Mitt Romney likes to say, "corporations are people." They represent human beings acting cooperatively to be economically productive.
In the e-book, Scott McNealy, the founder and former CEO of Sun Microsystems, writes a piece about tax policy that delves even more deeply into the "corporations are people" narrative.
To the vast majority of Americans who have held real jobs in the real economy, often in corporations, the point made perfect sense. Indeed, it seemed a statement of the obvious. A corporation, after all, is nothing more than people who have joined together to work cooperatively. The word "corporation" itself means "body of people." And in fact, corporations consist of two groups of "people": employees and shareholders. The former work hard to make a profit and earn their salaries and benefits. The latter, now widely dispersed across the economy by means of mutual funds and retirement-plan investment portfolios, provide the capital and can reap the financial benefits while also assuming the financial risk.
However, today I was listening to the radio and heard an intriguing segment about the latest campaign kerfluffle. I've been busy with work (at a corporation) and haven't kept up with the news, so didn't know much about the outsourcing that Obama has been accusing Romney of. Apparently, Bain Capital is accused of outsourcing some jobs, and this seems to be during a nebulous time between 1999 (when Romney stepped aside at Bain to run the Salt Lake City Olympics) and 2002, when he was still listed as CEO, President, and sole owner of Bain Capital, but wasn't actively involved in the day-to-day operations. Apparently, in response, Romney said:
"Well, I was the owner of an entity that is filing that information, but I had no role whatsoever in the management of Bain Capital after February of 1999," he told CNN. "Not that that would have been a problem to have said that I was with the firm beyond that, but I simply wasn't."
Since I had just been reading the jobs plan, the use of the word "entity" struck me as odd. So which is it? Is a corporation a person or some other type of entity?

The Benefits of Incorporating

To really understand this question, we have to consider the reasons why people incorporate their businesses. For example, in addition to my day job, I am self-employed as a freelance writer. I am not incorporated, however, and file taxes on my business as a sole proprietor of a business, The Philosopher's Stone.

As a  sole proprietor, my business is treated as an extension of me as a person. Though I have an Employer Identification Number (EIN) to file payroll taxes (my wife is my salaried employee), I have not been able to us this EIN to gain business credit cards or financing. When I set up my business checking account, I tried to use my EIN and was told that since I wasn't incorporated, I needed to set it up with my Social Security Number. When I fill out W-9 forms, the documentation says that the IRS prefers sole proprietorships to use my Social Security Number instead of my EIN. Since I am not incorporated, the credit cards I use for business expenses are in my own name, not in the name of my business.

When you begin to investigate home-business tax savings, you do find that there are a number of reasons to incorporate.
  1. Credit Benefits:The first reason to incorporate, as hinted at above, is that you can now begin establishing lines of credit and bank accounts using your business' EIN instead of your personal Social Security Number. If your personal credit is poor - perhaps due to a failed business or personal bankruptcy in the past - this can be a crucial benefit to gain the necessary financing for your business venture.

  2. Liability Protection:Related to the access to credit, corporations also create a level of liability protection. If a sole proprietorship goes under, all of the debt is in your name, so your creditors are able to come after your individual assets. You could lose not only your business, but also your house, your savings, garnishments against future wages, and so on. When you incorporate, a very powerful legal wall is built between these two entities. This is how people like Donald Trump can have multiple major corporate bankruptcies while maintaining their personal wealth. Even if the corporation is sued for some sort of illegal business activity and loses, the fact that it's a corporation can sometimes still protect the individual from having their personal assets garnished ... or vice versa.

  3. Tax Benefits: And, of course, there are tax benefits to being a corporation. Even as a sole proprietorship, I'm in the advantageous situation where my business income is taxed after expenses, in contrast to my personal income, which is taxed before expenses. Corporations have all sorts of tax loopholes created (we hope) with the genuine desire to enhance the ability of these corporations to grow their business and become economically prosperous, thus generating overall more wealth (and, ultimately, tax revenue).
The exact nature and degree of the benefits change depending upon the type of incorporation, of course, and I'm sure that there are many other benefits beyond these. Still, one glance at these reasons makes it clear that the point of incorporating is to separate the business activity from the individual.

Are Corporations People?

Taking all of this into consideration really calls into question the "corporations are people" narrative, which Romney has chosen to officially embrace on the campaign trail and in his jobs plan. While it is certainly true to say that a corporation involves "human beings acting cooperatively to be economically productive," this description by itself isn't particularly helpful. For example, the mob, street gangs, and a team of bank robbers are all attempting to "act cooperatively to be economically productive" as well! Certainly corporations are something different.

No, saying that a corporation is " nothing more than people who have joined together to work cooperatively" (as Scott McNealy does) is a gross over-simplification. I think of it more like this:
A corporation is a group of people who have jointed together to work cooperatively for economic advantage and have then asked the government for special dispensation to treat their group activity as distinctly (and legally) different from their personal activity.
The whole point of incorporation is that it provides a powerful division between the business and the personal activities. Saying that "corporations are people" requires completely ignoring the legal meaning of a corporation ... and negating the validity of the legal protections that corporation-hood confers.

This is why as soon as Romney was called into question on the activity of his corporation, he fell back on the true definition of a corporation. A corporation was no longer a noble reflection of the people united for economic productivity, but instead just an "entity" that files paperwork. His name happened to be on the line that said he was CEO, but that doesn't mean anything at all.
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