A corporation is one of the three basic forms of business organisation, the other two being sole proprietorship and partnership. Among those three basic forms of business organisation, corporation is seen as being the most complex but it also has the most benefits.
The legalities of a corporation
Under the common law, a corporation is considered as a juridical entity separate and distinct from its stockholders, board of directors, president, managers and employees. A corporation is given its own legal personality, therefore it has its own legal rights and privileges. Limitations For instance, a corporation can sue and can be sued. Nevertheless, there are several limitations to the legal rights and privileges acquired through incorporation like the civil right of suffrage.
Basic charateristics of a corporation
what is a corporation?
Aside from its separate legal personality, there are three other basic characteristics of a corporation namely, its transferable ownership, its limited liability and its centralised management.
A corporation's equity can be easily transferred from one person to another, especially in the case of publicly-traded corporations. The transferable ownership of corporations also indirectly gives birth to its limited liability.
Limited liability It is a much safer investment in the point of view of investors. Due to the fact that ownership can be easily transferred from one person to another, it is close to impossible to run after the past owners and creditors dealt with, thus giving corporations the nature of unlimited liability within the extent set by the law. Centralised management The management affairs of corporation is also centralised. The board of directors acts and decides on behalf of the corporation and all its stockholders.
Advantages of a corporation
Easy to obtain funds One of the main advantages of a corporation is that it can easily obtain funds just by offering additional shares of stock. Similarly, banks and lending institutions see corporations as being more reliable and trustworthy compared to sole proprietorship and partnerships. Better organisation The corporation's legal personality also gives rise to numerous benefits and privileges which it can enjoy. The structure of a corporation is also better organised while the governing rules and policies are made clear through the creation of By-laws and the Article of Incorporation.
Disadvantages of a corporation
While the many advantages of a corporation over sole proprietorship and partnership are quite obvious, the corporate structure also has several disadvantages.
Indirect double taxation
For one, the nature unlimited liability can be a double-edged sword which can result into creditors distancing themselves from the corporations. Moreover, corporations are subject to indirect double taxation.
Corporate controversies Corporations are also often criticised for a number of reasons including their supposed "self-serving" objectives, corruption and other corporate controversies.