Primitive Collaborations:
In the early chapters of human history, we thrived on collaboration. It could be hunting together or building shelters, but by doing this we learned the power of collective action. Going as far back as the Palaeolithic era 2.6 million years ago, early humans would embark on mammoth hunts requiring meticulous planning, coordination, and collective effort – where each member would have a role to play. Not only did this ensure their survival but also it laid the groundwork for sophisticated forms of collaboration in the future. While these early collaborations were informal, they exemplified the innate human instinct to cooperate which would have had a profound impact on shaping early societal structures.
Emergence of Contracts:
As societies evolved, the complexity of our interactions increased, and a growing need for formal agreements emerged.
Communities grew larger and more interconnected, but trust between individuals was more difficult to establish and maintain. Formal agreements provided a way to clarify expectations, rights, and responsibilities, and reduced the likelihood of disputes. As these economic activities went beyond simple bartering to include complex transactions and long-term arrangements, people sought ways to protect their interests and investments, to mitigate risks and ensure fair treatment.
With the emergence of specialised skills and professions, agreements regarding labour, compensation, and quality standards were also needed. Craftsmen and traders relied on contracts to secure payment for their services, and buyers to guarantee the quality of goods exchanged.
In this evolving landscape, the concept of a “contract” emerged as a pragmatic solution to address these interactions. Agreements could be recorded to ensure clarity, enforceability, and accountability and so laid the foundation for shaping legal frameworks.
Birth of Legal Entities:
With these more and more complex projects, the focus of contracts evolved from being agreements between individual people to agreements between collectives of people. The Law evolved to reflect these changes and was extended to cover not just ‘natural persons’ (people) but to incorporate collective endeavours known as ‘legal persons’ (companies) or the more commonly used synonym ‘Legal Entities’.
Conducting business as a Legal Entity provided many benefits. The risks associated with business ventures before the advent of legal entities included limited access to capital, continuity challenges, resource constraints, and exposure to many market uncertainties. By making an organisation an entity with its own obligations, structures and lifespan, one could mitigate these risks by providing a framework for capital formation, continuity planning, and risk-sharing among multiple investors.
But Legal Entities still carried serious personal risks that were a deterrent to investment and growth of business and trade.
The Emergence of Limited Liability
Historically individuals conducting business would operate under the principle of unlimited liability. Without legal protections and risk-sharing mechanisms, entrepreneurs bore the full brunt of financial losses and business failures.This meant they were personally liable for all debts and obligations incurred by the business – and if it failed or faced financial difficulties, creditors could come after the personal assets of the business owner to satisfy outstanding debts. This risk of financial and personal ruin was an extremely unappealing prospect for entrepreneurs and investors, and both a barrier and deterrent for people looking to embark on the development of new or ambitious enterprises.
Individual unlimited liability remained with investors with the advent of Legal Entities and continued for several decades. There was an amount of public distaste for limiting liability, with fears that it would cause a drop in standards.
By the Nineteenth Century, large scale industrial developments needed investments far beyond the wealth of most individuals. Unlimited liability was recognised as an impediment so the Law evolved to incorporate limited liabilities for certain types of Legal Entities.
These entities, or “legal persons”, in the form of corporations, shielded individuals from unlimited liability, incentivised investment and entrepreneurship, and enabled ambitious plans to develop by minimising the financial risks associated with business ventures.
Legal Frameworks:
The legal landscape evolved to accommodate these entities. Distinctions were formally drawn between “natural persons” (individuals) and “legal persons” (companies, organisations and government agencies) and established under specific laws.
In the UK, this evolution of Company Law can be traced back over a thousand or so years:
- Middle Ages: The Sovereign could issue a royal charter to create a ‘corporation’ and grant it certain rights and privileges.
- 17th-19th Century: Trade expansion leads to demand for new corporations established by Royal Charter or Act of Parliament. Formation costs were prohibitive so as a consequence many companies were formed by a contract with the form of a “Deed of settlement” dictating the relationship between members and enabling transfer of shares.
- The Limited Liability Act of 1855 allowed companies to be incorporated with limited liability, separating personal assets from corporate debts.
- Companies Act 1862: This consolidated existing laws relating to companies into a unified framework and introduced a standardised approach to company formation.
- Companies Act 1985 modernised corporate governance, enhanced shareholder protection, and formalised mechanisms for mergers, acquisitions, and reconstructions.
- The Companies Act 2006 brought significant changes to directors’ duties, shareholder rights, and disclosure requirements.
So from Middle Ages Guilds through to modern corporate entities, the evolution of company law has shaped the business landscape. As society evolves, so will the complexity of entities and the associated legal framework will need to continue to adapt, too.
The interesting aspect of this particular evolution is the concept of “corporate personhood,” which grants legal entities certain rights and responsibilities similar to those of natural persons. This concept acknowledges that corporations possess distinct legal identities that are separate from their shareholders or members and, as a result, can enter into contracts, own property, sue and be sued, and enjoy constitutional protections, giving them a level of legal standing and agency that was previously reserved solely for individuals.
Global Evolution:
The concept of entities crossed geographical boundaries and with the emergence of multinational corporations in the 20th century the need to harmonise corporate laws and regulations across borders was apparent.
Treaties, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG), and organisations, such as the International Chamber of Commerce (ICC), have been part of standardising legal frameworks and facilitating global commerce.
In addition to statutory laws, judicial decisions and legal precedents have also shaped the governance of legal entities.
Landmark cases, such as Dodge v. Ford Motor Company* [1] and Citizens United v. Federal Election Commission** [2], have influenced corporate governance practices, shareholder rights, and the boundaries of corporate power. From Société Anonyme (SA) in France to Proprietary (PTY) in Australia, various legal structures emerged worldwide. In the UK,”Ltd” (Limited) is the designation used to describe a private limited company which is registered at Companies House, while in the US, incorporation occurs at the state level.
These companies are legally distinct entities from their owners, and their liability is limited to the value of the shares they issue.
Ambiguity and Clarity:
Despite the clarity in legal definitions, there is still ambiguity in the notion of “parties” or “entities.” Parties typically refer to individuals or organisations that may be ‘party to’ a specific contract or agreement. As organisations grow in complexity, for example a modern global enterprise, the term “entities’’ tends to be used to designate both the party named in the contract (say a UK limited company) and the global parent company (say a US corporation listed on Nasdaq) which reflects a fuller picture of the organisational network involved in a transaction.
Although legal definitions aim to be clear, the concept of “entities” shows how complex the legal world can be and that, in situations where the specific legal status or nature of the parties and their related structures is unclear, legal practitioners and courts may still need to rely on additional context, statutory interpretation, and legal precedent to determine the rights, obligations, and liabilities of the parties involved. By recognising this complexity, we can make sure everyone is accounted for in contracts.
The concept of entities demonstrates the dynamic evolution of societal structures. From the earliest forms of collaboration to the emergence of formal agreements and legal protections, the story illustrates the role of entities in shaping human interactions and economic endeavours. Whether mitigating risks in business ventures, fostering innovation, or navigating the complexities of legal frameworks, entities are a cornerstone of modern civilization. By acknowledging these historical precedents and understanding the complexities of contractual relationships, entities enable societies to drive progress and prosperity in an ever-changing world.
*[1] Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).
**[2] Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).
