Corporation: Meaning, Features, Advantages and Disadvantages of a Corporation

A corporation is a legally recognized business entity separate from its owners.

It is established through the operation of law and enjoys many of the same rights and responsibilities as an individual.

Ownership in a corporation is typically represented by shares or stock. Shareholders, also known as stockholders, own the corporation by holding shares.

These shares can be bought and sold on the stock exchange, allowing anyone to become a shareholder.

While shareholders own the corporation, they do not necessarily manage its day-to-day operations.

Instead, they appoint a board of directors to oversee and govern the corporation.

The board of directors is responsible for making important decisions, setting policies, and selecting officers to run the company’s daily activities.

Corporations can enter into contracts, borrow money, initiate legal actions, own assets, pay taxes, hire employees, and engage in various business activities.

They are considered “legal persons” because they possess many of the same rights and responsibilities as individuals.

The process of establishing a corporation is called incorporation. In the past, corporations were created through a government-granted charter.

The charter contained details such as the corporation’s name, capital stock amount, number of directors, and the types of business activities it would undertake.

Nowadays, corporations are typically registered with the relevant government authority at the regional, state, or federal level.

Features of a Corporation

1. Separate legal existence: In the eyes of the law, a corporation is treated as a distinct entity, separate from its owners.

This means that it can sue and be sued, enter into contracts, and engage in legal activities.

2. Ownership: Ownership in a corporation is represented by stock certificates, and the owners are called stockholders.

The number of shares a stockholder owns determines their ownership stake in the corporation.

4. Ownership transferability: Shares of stock in a corporation can be easily transferred from one stockholder to another.

Stockholders can sell their ownership interest without needing approval from the corporation or other stockholders.

More so, the transfer of ownership rights among stockholders does not affect the daily operations or the assets and liabilities of the corporation.

5. Limited liability: The liability of the stockholders is limited to the amount they have invested in the corporation.

The personal assets of stockholders are generally protected from creditors seeking payment from the corporation.

6. Continuous Life: A corporation has a perpetual existence that is not affected by changes in ownership, the withdrawal of stockholders, or the death or incapacity of individuals involved in the corporation.

The corporation can continue to operate indefinitely, as stated in its charter.

7. Management: While stockholders own the corporation, the day-to-day management is typically entrusted to a board of directors.

The board of directors formulates policies, appoints officers, and makes important decisions for the corporation.

Advantages of a Corporation

1. Limited personal liability: One of the primary advantages of forming a corporation is the limited personal liability it offers to its owners.

Shareholders are not personally liable for the debts and legal obligations of the corporation.

This means that the assets of the shareholders, such as homes or savings, are protected in case the corporation faces financial difficulties or legal action.

2. Easy transfer of ownership: Corporations provide greater flexibility in transferring ownership compared to other business entities.

Ownership in a corporation is determined by the percentage of stock owned, and shares of stock can be easily bought or sold.

The easy transferability of ownership allows shareholders to transfer their ownership interests without requiring the approval of the corporation or other shareholders.

3. Continuity in operation: Another important advantage of a corporation is its ability to maintain continuity in its operations.

Unlike other business forms, such as partnerships or sole proprietorships, a corporation’s existence is not dependent on the lives or circumstances of its shareholders or directors.

Even if a shareholder or a director passes away or chooses to leave the corporation, the business can continue its operations.

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

4. Access to capital: Corporations have the advantage of being able to raise funds by selling shares of stock.

This provides them with better access to capital compared to other business entities.

Moreover, due to their indefinite life span, corporations can get loans from banks and other creditors more easily than any other form of business organization.

Disadvantages of a Corporation

1. Lengthy Application Process: Incorporating a business as a corporation involves a lengthy application process.

It requires extensive paperwork to determine and document the details of the organization and its ownership.

2. Double taxation. Another disadvantage of a corporation is the issue of double taxation.

The corporation itself is subject to income tax on its profits, and then when dividends are distributed to shareholders, those dividends are also subject to income tax at the individual level.

This means that the same earnings are taxed twice by the government.

3. Complex and costly formation and maintenance: Unlike other business entities, corporations require more paperwork and legal formalities.

They must file articles of incorporation with the state, create bylaws, issue stock certificates, hold annual meetings, and maintain detailed records of their activities.

A corporation also has to pay filing fees, franchise taxes, and other expenses to maintain its status as a legal entity.

These complexities and expenses add administrative burdens and financial costs to the operation of a corporation.

4. Little or no privacy: Corporations are often required to disclose certain information to the public through annual reports.

These reports provide a summary of the corporation’s financial data, including sales volume, assets, profits, and debts.

The publication of this information may compromise the privacy of the corporation and expose its business strategies to competitors or rivals.

5. Conflict of interest: Another disadvantage of a corporation is the potential for conflicts of interest.

While shareholders are the owners of the business, they elect a board of directors to oversee the management of the corporation.

This division of power can lead to conflicts, communication challenges, and power struggles between shareholders and the board of directors.

There is also the risk of losing control of the business if shareholders sell their shares to external parties or if the board of directors makes decisions that are not in the best interest of the shareholders.