fictional entity sounds like a character that might appear in a Sci-Fi movie, however, fictional entities
actually exist (whooosshhh – mind blown). A fictional entity is not fictional at all. In fact, a better term might be a “legal fiction”, or a truth that exists only by it’s creation through the law. An example of a legal fiction would be a “trust”, “adoptive parents”, or in this Module, those of “business actors”. A fictional entity for purposes of this course is a “Corporation”, “LLC”, or other legally recognized entity which is not a person.
Fictional entities are created for the following reasons, some more important than others depending on your needs: 1) control, 2) capital, 3) liquidity, and 4) liability. I.e., these entities provide you with the ability to control large entities while only having a small stake of your own, to raise money, and to not be personally liable for contracts or tortious liability. For example Bill Gates founded Microsoft and held a controlling stake in the business throughout despite owning approximately 2% of the shares. (Same for Steve Jobs and Mark Zuckerberg).
The first corporation was the Dutch East India company in the early 1600s. Until the 19th Century obtaining a corporate charter was only allowed by parliamentary declaration or act of Congress. In the 1840s corporate laws in the US were liberalized to allow more investment, primarily because of the railroads. Imagine the risk and amount of money needed for one or a small group of individuals to build a railroad from the Mississippi to California. With a corporation, they could spread that risk to tens of thousands of individual investors and gain a huge amount of capital in a short period of time.
Therein, the question: why is it helpful economically on a macro basis to allow individuals to shield themselves from liability when they have only a very small business? This was never really the intent of the statutes. Why would a two-person hair salon need the same protections that Microsoft has?