In this week’s Olam Hahalachah, Rabbi Mendel Prescott, Rosh Yeshiva of Machon Smicha, examines the halachic status of corporations and whether a company is considered a separate entity in halacha.

In the previous article, we discussed the status of stock ownership and whether it affects the halachic standing of a company — such as a bank — with regard to depositing, borrowing, or chometz ownership. Here we address a more fundamental question: what exactly is a company?

Virtually every major company today is a corporation. This means that it is regarded as a standalone legal entity distinct from its owners. Technically, no individual human being owns a corporation’s assets; the corporation itself is the owner. Shareholders own shares — contractual instruments that confer certain rights, such as voting and dividends — but the underlying assets belong to the corporation as a juridical person. How does halacha view this?

For background: the modern corporation traces its origins to the 1600’s, though at that stage the structure and legal implications of the corporate form had not yet fully crystallized. Over time, it evolved into what is known today as the “corporate veil” — the principle that a company and its owners are treated as entirely separate legal personalities.

One of the landmark rulings that firmly established this notion came about through a maneuver of a sharp Yiddishe kop, who proved to be a step ahead of his creditors in applying the newly developing legal structure.

Aron Salomon, a Jewish British boot manufacturer in the 1890s, operated his business as a sole proprietorship. At a certain point, he decided to incorporate his business as a legal corporation under the name “Salomon & Co. Ltd.” After that, the company took on significant loans in order to expand operations. But Mr. Salomon had structured the incorporation in a clever way. After he had formed the corporation, he “sold” his business, which had been his personal property till then, to the newly created corporate entity. The sale was on credit, and he, acting on the corporation’s behalf, assigned business assets as security for the payment owed to him by the corporation. At the time, this move was a strange one: how could one owe money to oneself?

Before long, the business failed, and the creditors came to collect. But Salomon came as well, claiming that he too was a creditor of the business, and stood in a senior position because his claim was secured by collateral. The creditors were incensed and argued that the entire arrangement was a sham. “Salomon & Co.”, they contended, was merely Aron Salomon under another name.

The lower courts ruled in favor of the creditors, reflecting what seemed to be the straightforward common-sense view. But the matter ultimately reached the House of Lords (the UK’s highest court) and they ruled decisively in Salomon’s favor. He was paid ahead of the other creditors, leaving them with little or nothing. In doing so, the court gave enduring legal force to the principle that a corporation is indeed a separate entity.[1]

Before turning to the halachic side, it is important to pause and appreciate how radical the concept of a corporation truly is. When a corporation is formed, the law declares that a new “person” has come into existence. That legal person can own property, enter contracts, sue and be sued, incur debts, and even commit crimes, entirely independently of the human beings who formed it or who own its shares. The corporation is not the shareholders, not the directors, and not the employees, but a separate legal being.

If one were to fully accept the existence of a corporate entity in halachic terms, many business-related halachic issues would become far simpler. Chametz, Shabbos, ribbis, and issurei hana’ah—among the common halachic barriers —would be less of an issue. It would be like a non-Jew—or, more precisely, a non-human legal being—owned and operated the business, while Jews held only residual claims or financial stakes.

Yet when viewed through halachic lens, the matter is far less simple. In halacha, an item not owned by any person is hefker. Accordingly, most poskim maintain that a corporation – the way law defines it – does not exist.[2] And since its assets are certainly not hefker, the corporation is the property of its shareholders. “Corporation,” in halachic terms, is simply a legal name assigned to a collection of assets and business activities that are owned by people.

There is, yet, a shittah that even halacha can recognize the existence of a self-standing entity. The Rogatchover Gaon,[3] in his distinctive approach, maintains this position. One of his examples is the property of the tzibbur, which is not hefker; it is owned, yet not personally owned by individuals. It belongs to a distinct entity called tzibbur, with the individual members serving as beneficiaries.

According to this, the members of a corporation—even where there is only a sole member—would not be the direct owners, and many halachic problems would be significantly reduced. This doesn’t mean that everything would automatically be permitted l’maaseh, since issurei derabbanan may still apply.[4] It would, however, open the door to some level of leniency.

Even according to the conventional view — that a corporation constitutes regular ownership — its legal structure nonetheless has halachic ramifications for ribbis. One of the defining features of a corporation is that the liability of its owners is limited, as demonstrated in the Salomon & Co story where the debts were imposed on the corporation and not upon Aron Salomon personally.

The poskim explain that this feature has halachic grounds through the principle of apoteki. The Gemara[5] discusses cases in which a borrower designates a particular asset as collateral, similar to a mortgaged property, giving the lender exclusive rights in that asset. A more specific form is apoteki mefurash, where the borrower stipulates, “You may collect only from this asset,” in which case the lender may collect only from the designated asset; and if that asset is lost or damaged, the lender has no further recourse. According to these poskim, corporate debt may be understood in these terms: the debt is real, but it is subject to an apoteki mefurash, namely, the assets of the company alone.

This creates a kulah for ribbis, as many poskim maintain that a loan secured only by an apoteki mefurash is not subject to ribbis de’oraysa. The reason is that the essence of a loan is the existence of personal indebtedness—shibud haguf. A non-recourse loan holds no shibud haguf, only shibud nechasim, and is therefore not classified as a genuine halva’ah. There are numerous examples throughout Perek Eizehu Neshech where ribbis is permitted when the principal itself remains at risk, such as in cases of mashkanta[6] and pardeisa.[7]

Rav Shimon Greenfeld[8] follows this approach and strongly maintains that lending to a corporation. He goes further and suggests that it may even be permitted miderabbanan as well—not because the shareholders do not own the company, but because they bear no personal liability.[9] He adds that the wording of the passuk supports this: “Lo sashich l’achicha”—to your brother—implying a personal loan to your brother, rather than a claim limited solely to his assets. Rav Moshe Feinstein[10] follows this line of reasoning and seems to permit lending to a corporation even miderabbanan.

The most prominent approach appears to be the middle-ground shittah: there is no ribbis de’oraysa, but there does remain an issur ribbis derabbanan. The Minchas Yitzchak[11] to assume this position, along with many other poskim.

Rav Yaakov Blau, in Bris Yehuda,[12] takes the opposite extreme. In his view, even though the loan is backed only by company assets, ribbis de’oraysa still applies. It remains a full-fledged loan to the members of the corporation, who are considered to owe the money, and the fact that the loan is tied to an apoteki mefurash does not alter its status. Nevertheless, he concludes that since many great poskim hold that there is no ribbis de’oraysa, one may rely on that view.

The practical difference between treating the matter as de’oraysa or derabbanan emerges in situations where there are additional tzeirufim l’kulah (e.g., when the majority shareholders are non-Jews). For an issur de’oraysa it would be far more difficult to rely on such leniencies, whereas for a derabbanan, the basis for leniency is stronger.

It should be emphasized that the kulah of apotaki applies only to depositing money in an interest-bearing account. Borrowing from a Jewish-owned bank remains prohibited, since the borrower bears personal liability toward the corporation, which is the property of its members.[13]

Likewise, other halachic concerns — such as chametz, issurei hana’ah, or Shabbos — are not resolved through this approach, since it maintains that a corporation remains an ordinary partnership. The only distinction is the lack of personally liability – which only helps for ribbis. Other kulos may apply – but the “corporate veil” itself is of no avail.

Rav Moshe Sternbuch[14] offers an interesting twist which can work for other halachic issues as well. Like the other poskim, he holds that a separate entity cannot exist, but he derives a kulah from that. He suggests that when one purchases stock in a corporation, since the company itself has no halachic existence, one has not truly purchased anything tangible at all; in a sense, one has purchased only air. Accordingly, the money paid remains a loan to the members of the company. Thus, for example, if the company deals in chametz, there would be no issue of bal yeira’eh, since the shareholders never truly acquired ownership of shares in a halachically operative sense. This would hold true regarding ribbis issues as well. But he concludes that this sevara alone, while good for limud zchus, is not strong grounds for real hetter. (In the previous article, we discussed some leniencies regarding the ownership status of small share-holders.)

[1] מעשה זו מובא בכל ספרי החוקים של דיניהם. גם הרב משה שטרנבוך (מועדים וזמנים חלק ג סימן רסט בהגה) מביא את כל המעשה בתוך אריכות דיונו בהגדרת חברת בע”מ.

[2] לדוגמה, ראה לשונו של הג”ר אלחנן וסרמן (בקובץ נועם ג’): “ועל הרוצים לחדש דחברה בע”מ הוא מעין בעלות חדשה, בעלות ולא בעלות, עליהם הראיה מהש”ס לגדר כזה, ועצם אי-מציאות הדברים בש”ס אינו נותן מקום כל דהו להסתפק,”

[3] בשו”ת צפנת פענח חלק ב (סימן קפד). וכדאי להעתיק לשונו: “והנה גדר באנק לא נקרא דבר מסויים, רק דבר של צורה לא חומר, כי גם מי שיש להם באנק הם אינם משועבדים לעצמם…”

[4] שכך מסיים הצפנת פענח: “לכן אין זה רבית בבאנק על פי דין תורה.” משמע שלא בא להתיר לגמרי.

[5] מסכת גיטין (מא ,א)

[6] מסכת בבא מציעא (סז, ב)

[7] שם (עג, א)

[8] שו”ת מהרש”ג חלק יורה דעה חלק א (סימן ג, וסימן ה)

[9] בשו”ת מנחת יצחק חלק ג (סימן א, אות ג) מפקפק אם אכן היתה כוונת המהרש”ג לפרסם זה ההיתר למעשה. וטען שחלק זה של התשובה נשאר רק בכת”י, עיין דבריו.

[10] אגרות משה יורה דעה חלק ב (סימן סג)

[11] חלק ג (סימן א)

[12] סוף פרק ז (ראה באריכות בהערות שם)

[13] כ”כ כל הפוסקים שדיברו בענין זה. גם באגרות משה (שם ד”ה “אבל טעם זה”) מבאר זה בפשיטות.

[14] מועדים וזמנים חלק ג (סימן רסט, בהגה)

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