What Is A Corporation?

What Is A Corporation? [2021]

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What Is A Corporation?

A corporation is an organization or business usually formed by a group of individuals. It is an entity that has most of the legal rights of an individual. A corporation can borrow and loan money, it can enter into contracts, it can sue and get sued, it owns assets, it pays taxes and hires employees just like a legal person (Watson, 2019). Unlike an individual, a corporation has no right to vote. A business corporation is preferred by many business-oriented individuals because of its existence as a separate entity from its owners. By incorporating a business, the owner is protected from the debts of the corporation and it is easier to raise funds and capital by selling stocks in shares in the stock exchange markets. Some of the well-known corporations include Coca Cola Company, Toyota Motor Corporation, and Microsoft Corporation (Buccola, 2016).

How To Form A Corporation

How To Form A Corporation

A corporation is formed through a process known as incorporation. The individuals who wish to start a corporation can visit a state agency or access services online where they fill the Articles of incorporation to obtain a state charter to start their operations. The Article of Incorporation contains the general information about the business such as the name of the corporation, the address of the registered agent, the type of corporation the business will be, the names and addresses of initial Board of Directors, the number and types of authorized shares, the duration of existence and the name, signature, and address of the incorporator. 

Shares And Shareholders

Shares are offered to potential shareholders who pay cash or give assets to the company in exchange for the shares after incorporations. Shares are sold and bought in the stock markets. A company can have a single or many shareholders. A large corporation selling many shares must register with the Securities and Exchange Commission or State Regulatory bodies. The shareholders pay for their shares whether in cash or assets once the shares are issued. Shareholders pay their taxes separately from those of the corporation. Employees who are shareholders in the corporation receive both dividends and salaries.

Board Of Directors

The shareholders hold an annual meeting to appoint the company’s Board of Directors whose main duty is to protect the assets and investments of the shareholders in the company. Most of the directors appointed have shares in the company and they work in upper management of the business (Pratiwi, et al 2020). The appointed Board of Directors appoints the company’s management, prepares the by-laws that will guide the running of the business, and supervises the day to day activities of the company to execute the business plan of the corporation. The established bylaws help the company to run smoothly as the duties, responsibilities, and rights of the shareholders and directors are clearly known.

The members of the Board of Directors are not responsible for any debts incurred by the corporation but they owe a duty of care to the business. Failure to which they will incur personal liability. Other roles of the Board of Directors include selection and approval of compensation to the Chief Executive Officer, it pays dividends, recommends the split of stock, discourage and recommend mergers or acquisitions and approve the financial statements of the company. The board of directors protects the shareholders’ investments in the company. It is advantageous when the directors hold shares in the company as they will be more inclined to steer the company in the right direction to achieve greater profits. (Gindis, 2020).  

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Liquidation

The corporation may be liquidated voluntarily or involuntarily. Voluntary liquidation occurs when the set objectives of the incorporation are achieved. Involuntary liquidation results from bankruptcy brought about by the creditors of the company (He, & Matvos, 2016). When a corporation decides to dissolve its business, a liquidator is appointed to sell the company’s assets. The money that is collected from the sale of the assets is used by the company to pay off all its creditors. The residual money is distributed among all the shareholders of the corporation. 

Advantages

The major advantage associated with corporations is the limited liability of the corporation’s debt. Limited liability means that the shareholders will enjoy the profits of the company through dividends but will not be liable for the debts the corporation incurs. Another advantage of forming a business corporation is a reliable supply of capital. This supply comes from amounts of money raised from the sale of shares and issuing of bonds. It is also easy to transfer ownership in a corporation since shareholders can sell their shares to transfer ownership. The perpetual life is also an advantage of a corporation, which means that the existence of the corporation has no limit even with the death of an owner. It has no limit because ownership can be passed through many generations through the transfer of shares (Sollars, 2018). 

Disadvantages

Incorporating a business also has its disadvantages such as double taxation, independent management, and excessive filling of taxes. Double taxation occurs with corporations since the company has to pay its taxes and also the dividends paid to the shareholders are also taxed. The incomes obtained in the corporation must be taxed which results in excessive filling compared to private business entities. When a company has very many investors in terms of shareholders whose majority interest is not clear, the managing team operate without oversight from its owners. The presence of many investors in the company is no longer under the control of the owners.

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REFERENCES

Buccola, V. S. (2016). States’ Rights against Corporate Rights. Colum. Bus. L. Rev., 595.

Gindis, D. (2020). Conceptualizing the business corporation: insights from history. Journal of Institutional Economics, 1-9. 

He, Z., & Matvos, G. (2016). Debt and creative destruction: Why could subsidizing corporate debt be optimal? Management Science62(2), 303-325.

Pratiwi, D., Mulyawan, S., & Lino, Z. E. (2020). The Role of Corporate Governance on Financial Statement Quality and Investor Reaction. Dinasti International Journal of Economics, Finance & Accounting1(1), 31-39.

Sollars, G. G. (2018). The corporation: Genesis, identity, agency. In The Routledge Companion to Business Ethics (pp. 239-256). Routledge.

Watson, S. M. (2019). The corporate legal person. Journal of Corporate Law Studies19(1) 137-166.

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