Introduction to Corporation
Corporation, an organization with a government charter that separates the rights and responsibilities of the organization from those of its members. A corporation, like a person, can buy and sell property, enter into contracts, sue and be sued. It also has the power to adopt by-laws to regulate its internal affairs. Although the term is most frequently used to refer to business firms, corporations are often organized on a not-for-profit basis to conduct the affairs of institutions (such as hospitals, churches, schools, colleges, and libraries), fraternal and other societies, and similar non-business groups.
In most business corporations, the members are the stockholders. Corporations sell stock to obtain funds for setting up or expanding their operations. A publicly held corporation is one whose shares are publicly traded. These shares are bought on the open market; except in the cases of new issues, the proceeds go to the selling stockholder rather than to the corporation. There are also nonstock corporations, including some service and religious organizations, in which no stock is issued and membership is decided on some other basis. A public corporation, such as a municipal corporation, is organized for some governmental purpose.
In the United States, a business corporation usually uses the word corporation or incorporated (abbreviated Inc.) in its title. In Canada, similar organizations, called limited joint-stock companies, use limited (Lid.) in their titles. In Britain, limited is used only for privately held or subsidiary companies; a company whose stock is publicly traded is called a public limited company (PLC).
Why Corporations Are Formed
The corporate form of organization has become almost universal among large business in the United States because of two major advantages—perpetual succession and limited liability.
Perpetual Succession means that the organization exists for a period specified in its charter (in many cases forever) regardless of changes in its membership that may occur through death or the transfer of shares. This is in contrast to a business organized as a sole proprietorship, which ceases to exist when the owner dies or withdraws from the business, or a partnership, which, unless otherwise provided for in its contract, would be similarly dissolved on the death or withdrawal of its organizers.
Limited Liability means that the members are not personally responsible for the debts of the corporation. In the case of a stock corporation, the shareholders risk only the money they pay for their shares. By contrast, in a business conducted as a sole proprietorship or partnership, the proprietor or partners risk not only the money they have invested in the business but also their personal assets (such as homes and private bank accounts). These assets may be taken by creditors if the business cannot meet its debts.
How Business Corporations Are Formed
The CharterA corporation is created by a charter issued by the sovereign or government. The charter grants the corporation status as a legal entity and sets forth its powers. In the United States, most corporations are chartered by states, although they may conduct business in states other than the chartering state. National banks and federal savings and loan associations are chartered under federal law, but there is no federal incorporation act that applies to other types of businesses. Government corporations (such as the Reconstruction Finance Corporation) and a few other types (the American Red Cross and the Boy Scouts of America, for example) have been chartered by special act of Congress.
The corporation laws of some states are considered more attractive and more complete than those of others. For this reason a corporation is frequently organized under the laws of a state in which it does not necessarily conduct operations. For example, a large number of the corporations listed on the New York Stock Exchange are organized in Delaware, even though many of these companies conduct few, if any, of their operations in that state.
OrganizationPersons organizing a corporation must find funds to obtain the equipment, buildings, and materials needed. The incorporators may provide the funds themselves and issue stock (shares in the corporation) to themselves. If they cannot provide all the funds, they may sell stocks to others; people who buy the stock become partial owners of the corporation. Funds may also be raised through a bond issue. Persons who buy bonds are lending money to the corporation.
The incorporators must apply for a charter from the state. After the charter is granted and funding arranged, the stockholders elect a board of directors to manage the corporation's affairs. The directors adopt by-laws and elect officers and are responsible to stockholders for the company's actions. The chairman of the board is the highest-ranking director.
The officers—usually a president, one or more vice presidents, a secretary, and a treasurer—conduct the day-to-day affairs of the corporation. Usually the president is the chief executive officer (CEO), the executive with the highest authority over daily operations and consequently having the most responsibility to the board for corporate performance. If someone other than the president is the chief executive officer, the president has more limited duties, in some cases only those specifically assigned to that office by the corporate charter. Officers have full-time jobs with the corporation, whereas directors, as such, do not. In many cases, however, corporate officers and other high executives are also directors.
When the corporation makes a profit, the directors may decide to declare a dividend (divide all or part of the profit among the shareholders) or to reinvest it in the corporation. If more capital funds are needed, additional stock may be sold or new bonds may be issued.
Development of Corporations
Although the modern business corporation has been known for only about 350 years, collective bodies similar to corporations were created by the Greeks as early as the time of Solon (638?–559 b.c.). The Romans also gradually developed similar institutions. Corporations were established in Britain after the Roman conquest and were subsequently recognized by English law. The first modern corporations were the great English trading companies, such as the East India and Hudson's Bay companies, formed in the 17th century.