CORPORATION–MEANING, FEATURES,ADVANTAGES AND DISADVANTAGES

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A corporation is a business governed that is legally registered and recognized as an entity distinct from its owners.

It is usually operated for the sole purpose of making a profit.

It is a business organization that has a separate legal personality from its owners. Ownership in most corporations is represented by shares.

Owners of corporations are called shareholders or stockholders. Anyone can be a shareholder by buying shares from the stock exchange.

Even though they own the business, shareholders do not necessarily run the corporation. 

Rather, they appoint the board of directors to oversee and manage the corporation. The board of directors controls the activities of the corporation.

The board of directors selects the officers of the corporation to run the day-to-day operations. The Board of Directors appoints the CEO, CFO, COO, and other chief executives of the corporation.

Corporations enjoy most of the rights and responsibilities that an individual has: they can enter into contracts, take a loan, sue, and be sued, own assets, pay taxes, hire employees, etc. Hence, a corporation is a ‘legal person’. 

The process of setting up a corporation is called incorporation. Before now, corporations were created by a government-granted charter.  

The charter will contain the name of the proposed corporation, amount of capital sticks, number of directors, types of business activity the proposed business will engage in, etc. 

Today, corporations are generally registered with the region, state, or federal government. Corporations are usually regulated through state laws.

Initially, a corporation files an article of incorporation with the government. The article of incorporation would list the nature of the corporation, the names, and the amount of stock it is entitled to issue.

Features Of A Corporation

1. It is a legal entity: in the eyes of the law, a corporation is a natural person. Hence, It can sue and be sued, enter into contracts, etc.

2. Owners: The owners of a corporation are called shareholders or stockholders. Anyone can become the owner of a publicly- traded corporation by buying shares from the stock market. 

Shareholders usually profit through dividends or capital appreciation.

3. Article of Incorporation: When a corporation is formed, it is said to be incorporated. 

Hence, it is given an article of incorporation. This differs from the article of organization given to a limited liability company(LLC).

4. Stockholder certificate: Like the way membership certificate evidence or validate LLC owner rights, the stockholder certificate validates the ownership rights of shareholder. 

However, stockholder certificate is fast becoming a thing of the past due to the massive use of the internet.

5. Life span: Corporation(in theory) operate forever. A corporation can only end if its owners decide to terminate it.

6. Administration:  The corporation is administered by a board of directors appointed by the shareholders.

Advantages Of Corporation

1. Limited liability: The shareholders of a corporation are only liable up to the amount of their investment. 

This implies that in the event of liquidation if the business assets are inadequate to meet its liability, the owners do not contribute anything. 

In simply put, the losses of the shareholders do not surpass the amount they contribute to the business.

2. Continuity in operation: A corporation can come to an end only if the Board of directors and the executive team decide to do so. 

Even the death of a board of directors or a shareholder would not end the business. 

Continuity ensures that capital is available for long-term investment which would not have been possible if the business was discontinued.

3. Availability of capital: Extra capital can be raised easily through the stock market. 

In a corporation, It's easy to raise large capital through the public because large amounts can be raised by dividing it into smaller units of shares. 

This infers that the price for those shares will be cheap thereby attracting many buyers. 

Moreover, corporations easily get loans from banks better than other forms of business organizations.

4. Ownership of a corporation is typically transferable: The ownership is represented by the number of share certificates held by a person, and this makes the transfer of ownership very easy. 

This is especially true if the shares are held In a public company. However, the transfer of shares held in a private company is relatively complicated as there are many restrictions.

5. Some expenses are tax-deductible. Owners can obtain tax-free benefits like a discount for a retirement-deductible pension.

Disadvantages Of A Corporation

1. Complicated formalities: Establishing a corporation is a very complicated process. It takes many stringent formalities to set up a corporation.

The owners have to get the approval of different regulatory authorities. 

That's not all, the founder would ensure that the business fulfils all the standards set by stock exchanges if he is to be listed in the stock exchange. 

All this takes a long time to conclude which may discourage prospective founders.

2. High cost of registration: The cost of incorporating and other legal fees is very high when compared to other forms of business. 

These high costs may be substantial for small firms with little financial resources.

3. Double taxation: Another argument against a corporation is the problem of double taxation.

Corporations paid corporate tax on their profit, after which, they distribute earnings to the shareholders(through dividends).

These shareholders are also taxed at separate rates. 

This makes corporation business less appealing because all profits will eventually be double taxed.

4. Misrepresentation or conflict of interest: The decision-making in a corporation is done by the board of directors. 

Sometimes, the decision taken by the Board of Directors and executives may not represent that of the owners(shareholders).

5. Little or no privacy in a corporate form of business. This is because corporations are mandated to publish their annual report to the Public. 

These reports summarize data on sales volume, new assets, profits, debts, and many other qualitative and quantitative information. 

Also, In fulfilling this regulation, a corporation may end up divulging its business strategies to its rivals or competitors.

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6. Consequences of a lot of regulation: Lots of Complicated regulations consistently lead to litigation, penalization against the business. 

As noted earlier, Corporations are mandated by law to obey certain regulations such as having a Board of Directors, holding meetings at periodic intervals, and publishing financial reports annually. 

The business could be penalized for small mistakes or manipulation by top executives. 

For example, if the accounts department of the company fails to publish some of the debtor's names (for privacy reasons), the regulatory agencies may assume that it is a fraud and may penalize the corporation. 

This may demotivate investors and also reduce the value of the company’s stock.

Conclusion

We have come to the end of this blog post. We covered the meaning, features, advantages, and disadvantages of a corporation. 

For a recap, a corporation is a business organization that is distinct from its owners. Ownership in corporations is represented by a stock of shares.

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