Corporation

Corporation is a way of organizing business which is registered by government and is considered to be a separate, independent legal unit from its owners and founders. After the registration, a corporation gains most of the legal rights and duties as a legal person, for example, it can own property, invest into stocks and other assets, take legal actions and be sued, provide employment for workers, enter into legal agreements and participate in financial activities as a single entity, i.e. lend and borrow money, pay taxes autonomously from its owners.

Main features of a Corporation

The key feature that distinguishes a corporation and is considered as its main advantage is limited liability of its owners. As it has been stated above, a corporation is a single legal entity, so its holders aren’t personally and legally responsible for its debts and obligations. Details of a corporation organizing and minor features may vary in different jurisdictions, though this main principle of limited liability of shareholders remains the same. At the same time, owners and shareholders have a share in a corporation’s profit, which makes this form of organization reasonably attractive and popular for investors.

Types of Corporations

Most corporations are for-profit, which means that they are organized by their owners in order to gain profit. There also are not-for-profit and nonprofit corporations created for public and social purposes, which are represented by a huge range of organizations like charities, educational bodies, religious institutions and other entities.

Another way to divide corporations into groups is considering whether they are enabled to issue stocks or not. In case a corporation issues stocks, it’s called a stock corporation, and, accordingly, a non-stock corporation is unable to do so. Nonprofit corporations are often non-stock organizations as well. Owners of a nonstick corporation are called members of the corporation instead of shareholders. The most common type of corporation is a for-profit stock corporation.

It’s also important to distinguish private corporations from publicly traded corporations. Private corporations have a limited number of owners, usually just one or several. A shareholder of a publicly traded corporation might be anyone able to invest in its shares, so there might be hundreds and thousands of owners of a publicly traded corporation.

How a Corporation is organized

A corporation is set up through a process of incorporation. It is organized by a person or a group of people who share a common goal, who are also typically the shareholders of the corporation’s stock. This fact consolidates their right to own a corporation. To register a corporation as a legal entity, a compilation of documents reflecting all the relevant information on the corporation’s activities is prepared and filed with the government. Those documents are called articles of incorporation.

Precise rules of incorporation might be different from country to country, and even within different territories of one country, but in most cases it requires filing articles of incorporation.

Another important issue when organizing a corporation is that the corporation’s stocks must be issued after the registration and then shared between the owners. Shareholders aren’t responsible for the corporation’s possible debts and losses, but they are obliged to choose a board of directors for the corporation during a meeting, which is usually held once a year. Every shareholder has a certain number of votes, which correlates with the amount of shares he or she holds. 

The corporation’s dealings are managed by the appointed executives, and shareholders don’t have to manage the corporation’s activities directly, though it’s possible for a shareholder to take a position in the board of directors. 

Shareholders gain profits from the corporation’s possible income, while executives are paid salaries, but all of them don’t have personal liability for the corporation’s debt. At the same time, executives are still responsible for corporation’s efficiency and productivity, but they can’t be sued personally instead of the corporation.

All the abovementioned information applies to a publicly traded stock corporation. If owners want to reorganize a private corporation into a publicly traded one, the process will be longer and more complicated, as it requires disclosing all the needed details of the corporation actions to the government and potential shareholders.

How a Corporation cease to exist

If a corporation doesn’t achieve the goals set by its owners, it’s possible to stop its activity by liquidation. The process of liquidation of a corporation is usually executed by an appointed liquidator, whose mission is to sell the corporation’s assets and pay off the existing debts. In case there is anything left, the capital is distributed between the stockholders of the corporation. 

This process may be started voluntarily or be organized by the third party in case the corporation is in debt to it.