1

I've just understood the concept of writing a contract. It is just an agreement between two people written on the paper and signed by all the parties involved. So, if it is possible to write contracts, then why do we need a specific law for companies? Can't we construct a company simply wording our terms and declaring all the rules of the "company" in a contract without registration?

For example, one of the benefits of registering a company is its liability shield it gives us. So why not mention in the contract "no individual mentioned in this contract is liable..." (please forgive me if my question is naive). Another benefit of a company is, being able to issue shares. So to cover this, the contract could contain "All assets mentioned have a shared ownership. Each person in the contract is assigned certain 'ownership points' (a different word for shares). And these ownership points declare each individual's ownership of the asserts..."

Couldn't we implement all the features of a company, one after the other, simply by writing a contract? Please tell me why this isn't possible and what I don't understand. And again, sorry for this naive question.

I would like to hear this answer in the context of any country. Though I would be able to relate well, when answered in the context of India.

3

The liability shield is the big one, and it can't be achieved with a contract.

Just because the contract says you're not liable, that doesn't make it true. If I sign a contract with my friend that says "Nate Eldredge is hereby the King of France", that won't make me the king, nor will it force anyone except maybe my friend to acknowledge me as the king. By its nature, a contract can only bind the parties to the contract, and has no effect on the rights of anyone else.

Suppose, then, that Alice and Bob agree to start a pizza delivery business, using a contract like you suggest. Their delivery car crashes, injuring Carol, a bystander, who incurs medical bills that exceed the assets of the business. Carol decides to sue Alice and Bob personally. Sure, Alice and Bob have a contract, and maybe it prevents them from suing each other, but it certainly doesn't prevent Carol from suing them; Carol never signed it. So Carol can still go after Alice and Bob's personal assets.

Thus contract law cannot give them a liability shield. However, the government can, since it makes the laws about who can sue whom under what circumstances. And it has made laws saying that Alice and Bob can be protected from such suits, but only if they form a company according to the process that the law sets forth. So that's what they have to do.

  • Thanks for the answer ! But I have been reading this: cloud.google.com/terms, where google says they are not responsible for the damage caused by the service. They say that they are not even responsible if the service they provide does not exactly come under the commonly accepted definition of the service. It is like saying "You accept not to sue us even if it is not a cloud service we are providing". So, why can't the employees all sign terms that clearly say what they can and cannot do? – Sreram Sep 14 at 1:55
  • I'm talking about something more like a framework, where every person/business we interact with must accept our terms-framework before doing business with us. The basic guidelines of the "rules" must be written, copyrighted and made public. A name must be assigned to it, with a referable link. So every time we want the entire framework of terms to be effective, it must be mentioned in the contract with its name and the link pointing to it. Maybe this is a overhead company registration solves. It does not require us to always sign contracts, especially in situations where it is not possible – Sreram Sep 14 at 2:01
  • 2
    Think again about my example. Alice and Bob never intended to "do business with" Carol, but nonetheless she was harmed by their actions and so they are liable to her. Thus, unless you intend to get every person in the world to sign your contract, you can't avoid all liability. – Nate Eldredge Sep 14 at 2:46
  • Thanks @Nate Eldredge. I understand now. So the government has the power to "forcefully sign a contract" with all the citizens. The companies act is one such "contract" with the rest of the citizens, which immediately becomes effective when a company is registered with the government. This seems to be clearly something only a government can do. – Sreram Sep 14 at 14:27

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.