The Citizens United decision, the First Amendment, and a short treatise on corporations - Granite Grok

The Citizens United decision, the First Amendment, and a short treatise on corporations

One of the candidates in the Republican primary for US Senate has recently surprised most liberty-loving citizens of New Hampshire by supposedly supporting an amendment to the First Amendment of the US Constitution to overturn the decision of the Supreme Court of the United States in the well-known Citizens United case!

Related: Republican Senate Candidate from NH Wants a Constitutional Amendment to Overturn Citizens United

It is reasonable to question whether he has actually read the opinion in that case, all 183 pages of it.  The decision of SCOTUS in the Citizens United case is long and complex and rather than having a single majority and a single dissenting opinion, there are a multiplicity of opinions from the justices.  Query:  which of the various opinions in the case did this candidate feel made the strongest argument?

The ultimate outcome of Citizens United is the reaffirmation of the unsurprising concept that the First Amendment protects all sorts of political speech by all sorts of people and organizations.

Like many aspects of the Bill of Rights, the First Amendment says what the government is prohibited from doing, rather than purporting to grant rights to us, rights that we, as free people, already have under natural law.

Many critics of the Citizens United decision have derided that decision because it allows corporations and other lawful organizations to engage in political speech just as may be done by individuals.  But case law in every, or most every, state for many years prior to Citizens United has described corporations as “artificial persons.”

The business purpose of a corporation is defined in its articles of incorporation.  Organizers of a corporation handicap themselves if they define the business purposes for which the corporation if formed narrowly.  Thus, most smart drafters of  articles of incorporation indicate in those articles that the business purpose(s) for which the corporation is formed are the conduct of “any lawful business,” which is permitted by the corporate laws of most if not all states.  This gives the corporation the flexibility to conduct business in whatever lawful way it deems appropriate without having to amend its articles of incorporation if and when it decides to go in a new or different direction.

The long history of corporations in the United States clearly indicates that they have been conceived as a way to encourage capital formation (i.e. investment), since people are more likely to invest in an enterprise that limits their personal liability to their contribution to the capital of the enterprise rather than being opened up to unlimited personal liability if the corporation incurs liabilities in excess of its assets.

The corporation itself has unlimited liability- in other words, the entirety of the capital and assets of the corporation is always at risk in the conduct of its business.  The limitation of liability applies only to the stockholders, but only if the corporation has followed the “rules” in its organization and operations.

In other words, the limitation of liability afforded to the stockholders can be lost if the corporation has not been properly formed and/or its legal operations after formation have been sloppy.  Many small corporations may have been formed properly but have turned “sloppy” almost immediately after formation.

There are probably thousands of small corporations in our state and across the country that followed the quite simple rules for formation (which can usually be done in a matter of moments online) but fell down in the legal follow-through.  Often, they have never set up their minute and stock book, adopted by-laws, actually issued certificates of stock, held or waived the holding of annual meetings, etc.  The reality is that many times a small corporation finally gets some of its act together when it is forced to undergo an IRS audit, at which time the auditing agent typically will ask to examine the minute and stock book.

A favorite tactic attempted against stockholders in a corporation whose legal affairs have not been handled as precisely as the law requires is to try to “pierce the corporate veil” and impose personal liability on the stockholders, in which it is claimed that the corporation, not having been run properly,  is merely the alter ego of the individual stockholders.  That is the risk to stockholders in a corporation that has not followed the rules.

The “annual report” required to be filed by corporations in most every state does not contain, or purport to contain, a report of the “activities” of the corporation, which are actually quite private.  Rather it typically only discloses the names and mailing addresses of the principal officers and directors, and the registered agent for the corporation upon whom legal process may be served if the corporation is being sued.

The annual report does not disclose the stockholders, the list of which is private except in some extremely limited situations in which a stockholder wants to be able to contact other stockholders in the same corporation.  The minutes of the formal actions taken by the corporation are private and not disclosed in an annual report to the state.

The true purposes of the annual report to the state are (a) to raise money for the state; and (b) to give the public at large the information needed to be able to initiate suit against the corporation effectively.

Corporations whose stock is publicly held are typically required to be registered with the federal Securities and Exchange Commission and to file and make public very detailed information about the corporation, its activities, and its finances on a regular basis.  But this does not apply to privately held corporations.

Of course, it is usually good practice in a small private corporation for there to exist an agreement between the stockholders seeing forth all sorts of governance matters, including any restrictions on transfer of the stock (such restrictions also need to be endorsed on the stock certificates), any buyout or redemption provisions, composition of the board of directors, requirements for financial audits, any requirements for annual reports to the stockholders, and virtually anything that the stockholders deem pertinent.

Some legal practitioners believe that an investor acquiring a minority interest in a small corporation without a stockholders’ agreement acts foolishly, and that legal counsel advising the investor falls below the applicable standard of care unless that counsel has strongly advised of the necessity of a stockholder agreement to protect the interests of the minority stockholder.  It is important to note that counsel to the corporation is usually not, or should not be, the counsel to the investor, because their roles are inherently conflicting.

Finally, because of our tax laws that effectively double tax corporations and its stockholders, once at the level of the corporation on its taxable profits and a second time at the stockholder level when a dividend is received by the stockholders, legal ingenuity has produced a variety of other legal entities that encourage capital formation while affording limited liability to investors, but limit the tax impact to a single level, at the level of the investors.  Thus, we now have limited liability companies, limited partnerships, limited liability partnerships, et al., all of which are deemed under the tax laws as “passthrough entities,” with taxation imposed only at the investor level if they have been properly formed and operated.

The status of a corporation or other legal entity as being a 501(c)(3) is strictly a matter of the federal tax laws and has no bearing on personal or entity liability, which is determined under state law.

Section 501(c)(3) is a section of the Internal Revenue Code that defines categories of legal organizations that are not taxed (except on their unrelated business income, called UBIT) and as to which contributions are tax deductible, within limits, by the donors.  But 501(c)(3) organizations are generally prohibited from engaging in political activities and political advocacy.

Thus, most politically active organizations seek qualification under 501(c)(4) to avoid taxation at the entity level but as to which contributions are not tax deductible by the donors because the entity can engage in political activities and advocacy.  This is why you will often see politically active organizations being qualified under 501(c)(4), with a “related” foundation or some such entity qualified under 501(c)(3).  It is supposed to work if there is no active “coordination” between the two entities.

A corporation or other entity seeking to be “qualified” as a 501(c)(3) or 501(c)(4) attains that distinction by filing with the IRS a Request for Determination with required supporting documentation.  Only when the IRS has acted favorable on the Request for Determination does the IRS issue a Determination Letter identifying the corporation or other entity and stating that it will be recognized as a 501(c)(3) or 501(c)(4), as applicable.  That Determination Letter is a valuable document that should be kept with the valuable papers of the corporation or other entity.

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Any attempts to reverse the Citizens United decision by amending the First Amendment to our constitution would likely open up the possibilities of amending other portions of our constitution and Bill of Rights, which is exactly what many on the left would like to see happen.  Of special interest to the left would be curtailment of the protections afforded to us by the Second Amendment to the Constitution.

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