Understanding the Corporation

Characteristics of a Corporation

Corporations are separate legal entities with a wide variety of legal, organizational, and operational characteristics.

Learning Objectives

Recognize the various facets of organizational requirements and characteristics

Key Takeaways

Key Points

  • Organizations are legally recognized individual entities operating within the legal confines of a given economy.
  • Organizations can be privately held or publicly traded, as well as for profit or nonprofit. Organizations have liabilities, profits, taxes, and other legal reporting requirements.
  • Ownership of an organization is generally determined via holding a certain percentage of existing corporate shares.
  • A board of directors is often elected to oversee the organization’s practices and operations and to act as a voice for shareholders.
  • The incorporation process has a number of steps that individuals must take in order to legally create a new organization.

Key Terms

  • insolvency: When debts exceed existing assets (i.e. the ability to pay them).

Defining the Corporation

A corporation is legally recognized as a person and singular legal entity within the confines of the law, independent of any specific individual who may have started it. Corporations are started and maintained through legal registration and periodic upkeep, and have tax reporting responsibilities within the region in which they are registered.

Organizations can be publicly traded (and thus publicly owned) or privately held, as well as for profit or non profit. In the United States, a corporation is generally considered a larger business organization, though non-profits can still be similarly registered. Generally speaking, corporations interact with the broader economy through operations, profits, and taxes.

U.S. Corporate Profits: This chart illustrates the overall corporate profit over time in the U.S.

Corporate Tax Rate of Time (U.S.): This chart illustrates the effective corporate tax rate in the U.S. over time.

Ownership

Corporations are, in theory, owned and controlled by members and shareholders. To simplify this logic a bit, if a company is owned equally by 5 different people, then each individual owns 20% of the value of the overall organization. As a result, ownership has a significant capital component. Organizations such as credit unions and cooperatives function in a  slightly different manner, where each additional member of the project may own equal shares regardless of capital inputs.

While larger, publicly traded organizations may be owned by hundreds of thousands of shareholders, it is common practice for members to elect a board of directors to oversee the actual running of the organization (two boards are elected in some countries: a managerial board and a supervisory board). The respective boards will oversee typical operations of the firm, and ensure that the best interests of the community and the owners are being upheld.

Liabilities

Organizations are held accountable for their actions, just as individuals would be. As a result, organizations can be brought to court on various charges and convicted of criminal offenses. Organizations can also be dissolved for a wide variety of reasons including insolvency, bankruptcy, monopoly, and a wide variety of other failures to operate profitably and/or ethically.

The individuals within an organization, granted it is a limited liability organization, are somewhat insulated from the broader failings of the organization. This means that debts being taken out on behalf of the organization are not the liability of the individuals working there, but instead a liability of the legal entity that is called the corporation.

How to Incorporate

It’s worth noting what is traditionally required of an organization to become a corporation. In the United States, each state is different, but the following are common denominators:

  • Business purpose (general and, sometimes, specific)
  • Corporate name
  • Registered agent
  • Incorporator
  • Share par value
  • Number of authorized shares of stock
  • Directors
  • Preferred shares
  • Officers

Formation of the Corporation

Registration is the main prerequisite to a corporation’s assumption of limited liability.

Learning Objectives

Summarize the purpose of the articles of incorporation

Key Takeaways

Key Points

  • Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors.
  • Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership.
  • Some jurisdictions do not allow the use of the word “company” alone to denote corporate status, as it may refer to a partnership or some other form of collective ownership.
  • In many jurisdictions, corporations whose shareholders benefit from limited liability are required to publish annual financial statements and other data, so that creditors who do business with the corporation are able to assess the creditworthiness of the corporation.

Key Terms

  • charter: A document issued by some authority, creating a public or private institution, and defining its purposes and privileges.
  • corporation: A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.
  • publicly held corporation: a business entity owned by shareholders who may buy or sell their shares to anyone through a stock exchange
  • privately held corporation: a business entity owned by a small number of people, and not having shares of ownership sold via a stock exchange or other public market
  • limited liability: The liability of an owner or a partner of a company for no more capital than they have invested.

Formation

Historically, corporations were created by a charter granted by government. Today, corporations are usually registered with the state, province, or national government, and regulated by the laws enacted by that government.

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Charter of Harvard College: In 1636, New England ministers founded Harvard College, America’s first institution of higher education.

Registration is the main prerequisite to a corporation’s assumption of limited liability. The law sometimes requires the corporation to designate its principal address, as well as a registered agent (a person or company designated to receive legal service of process). It may also be required to designate an agent or other legal representative of the corporation.

Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation’s directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.

The law of the jurisdiction in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to the laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.

Naming

Corporations generally have a distinct name. Historically, some corporations were named after their membership: for instance, “The President and Fellows of Harvard College. ” Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers based on a registration number (for example, “12345678 Ontario Limited”), which is assigned by the provincial or territorial government where the corporation incorporates.

In most countries, corporate names include a term or an abbreviation that denotes the corporate status of the entity (for example, “Incorporated” or “Inc.” in the United States) or the limited liability of its members (for example, “Limited” or “Ltd.”). These terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not. Their use puts everybody on constructive notice that they are dealing with an entity whose liability is limited, and does not reach back to the persons who own the entity: one can only collect from whatever assets the entity still controls when one obtains a judgment against it.

Some jurisdictions do not allow the use of the word “company” alone to denote corporate status, as it may refer to a partnership or some other form of collective ownership (in the United States it can be used by a sole proprietorship but this is not generally the case elsewhere).

Financial disclosure

In many jurisdictions, corporations whose shareholders benefit from limited liability are required to publish annual financial statements and other data, so that creditors who do business with the corporation are able to assess the creditworthiness of the corporation and cannot enforce claims against shareholders. Shareholders, therefore, experience some loss of privacy in return for limited liability. This requirement generally applies in Europe, but not in Anglo-American jurisdictions, except for publicly traded corporations where financial disclosure is required for investor protection.

Steps required for incorporation

  1. The articles of incorporation (also called a charter, certificate of incorporation or letters patent) are filed with the appropriate state office, listing the purpose of the corporation, its principal place of business and the number and type of shares of stock. A registration fee is due, which is usually between $25 and $1,000, depending on the state.
  2. A corporate name is generally made up of three parts: “distinctive element”, “descriptive element”, and a “legal ending”. All corporations must have a distinctive element, and in most filing jurisdictions, a legal ending to their names. Some corporations choose not to have a descriptive element. In the name “Tiger Computers, Inc.”, the word “Tiger” is the distinctive element; the word “Computers” is the descriptive element; and the “Inc.” is the legal ending. The legal ending indicates that it is, in fact, a legal corporation and not just a business registration or partnership. Incorporated, limited, and corporation, or their respective abbreviations (Inc., Ltd., Corp. ) are the possible legal endings in the U.S.
  3. Usually, there are also corporate bylaws which must be filed with the state. Bylaws outline a number of important administrative details such as when annual shareholder meetings will be held, who can vote and the manner in which shareholders will be notified if there is need for an additional “special” meeting.