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Type of Business: Corporation

A corporation is a separate legal entity, usually used to conduct business. Corporations exist as a product of corporate law, and their rules balance the interests of the shareholders that invest their capital and the employees who contribute their labor. People work together in corporations to produce. In modern times, corporations have become an increasingly dominant part of economic life. People rely on corporations for employment, for their goods and services, for the value of the pensions, for economic growth and social development.

The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, shareholders only stand to lose their investment, and employees will lose their jobs, but neither will be liable for debts that remain owing to the corporation's creditors. This rule is called limited liability, and it is why corporations end with "Ltd." (or some variant like "Inc." and "plc").

Despite not being persons, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they lose money into insolvency. Corporations can even be convicted of criminal offences, such as fraud and manslaughter. Five common characteristics of the modern corporation, according to Harvard University Professors Hansmann and Kraakman are...

  • delegated management, in other words, control of the company placed in the hands of a board of directors

  • limited liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares)

  • investor ownership, which Hansmann and Kraakman take to mean, ownership by shareholders.

  • separate legal personality of the corporation (the right to sue and be sued in its own name)

  • transferrable shares (usually on a listed exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris)

Ownership of a corporation is complicated by increasing social and economic interdependence, as different stakeholders compete to have a say in corporate affairs. In most developed countries excluding the English speaking world, company boards have representatives of both shareholders and employees to "codetermine" company strategy. Calls for increasing corporate social responsibility are made by consumer, environmental and human rights activists, and this has led to larger corporations drawing up codes of conduct. In Australia, Canada, the United Kingdom and the United States, corporate law has not yet stepped into that field, and its building blocks remain the study of corporate governance and corporate finance.


Types of Corporations

Most corporations are registered with the local jurisdiction as either a stock corporation or a non-stock corporation. Stock corporations sell stock to generate capital. A stock corporation is generally a for-profit corporation. A non-stock corporation does not have stockholders, but may have members who have voting rights in the corporation.

Some jurisdictions (Washington, D.C., for example) separate corporations into for-profit and non-profit, as opposed to dividing into stock and non-stock.

For-profit and non-profit

In modern economic systems, conventions of corporate governance commonly appear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, the courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or in a similar manner) when applying principles to non-profit organizations — as the underlying structures of these two types of entity often resemble each other.

Closely held and public

The institution most often referenced by the word "corporation" is a public or publicly traded corporation, the shares of which are traded on a public stock exchange (e.g., the New York Stock Exchange or Nasdaq in the United States) where shares of stock of corporations are bought and sold by and to the general public. Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of shares. Many such corporations are owned and managed by a small group of businesspeople or companies, although the size of such a corporation can be as vast as the largest public corporations.

Closely held corporations do have some advantages over publicly traded corporations. A small, closely held company can often make company-changing decisions much more rapidly than a publicly traded company. A publicly traded company is also at the mercy of the market, having capital flow in and out based not only on what the company is doing but the market and even what the competitors are doing. Publicly traded companies also have advantages over their closely held counterparts. Publicly traded companies often have more working capital and can delegate debt throughout all shareholders. This means that people invested in a publicly traded company will each take a much smaller hit to their own capital as opposed to those involved with a closely held corporation. Publicly traded companies though suffer from this exact advantage. A closely held corporation can often voluntarily take a hit to profit with little to no repercussions (as long as it is not a sustained loss). A publicly traded company though often comes under extreme scrutiny if profit and growth are not evident to stock holders, thus stock holders may sell, further damaging the company. Often this blow is enough to make a small public company fail.

Often communities benefit from a closely held company more so than from a public company. A closely held company is far more likely to stay in a single place that has treated them well, even if going through hard times. The shareholders can incur some of the damage the company may receive from a bad year or slow period in the company profits. Workers benefit in that closely held companies often have a better relationship with workers. In larger, publicly traded companies, often when a year has gone badly the first area to feel the effects are the work force with lay offs or worker hours, wages or benefits being cut. Again, in a closely held business the shareholders can incur this profit damage rather than passing it to the workers. Closely held businesses are also often known to be more socially responsible than publicly traded companies.

The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is that publicly traded corporations have the burden of complying with additional securities laws, which (especially in the U.S.) may require additional periodic disclosure (with more stringent requirements), stricter corporate governance standards, and additional procedural obligations in connection with major corporate transactions (e.g. mergers) or events (e.g. elections of directors).

A closely held corporation may be a subsidiary of another corporation (its parent company), which may itself be either a closely held or a public corporation.

Mutual benefit corporations

A mutual benefit nonprofit corporation is a corporation formed in the United States solely for the benefit of its members. An example of a mutual benefit nonprofit corporation is a golf club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide, in its corporate bylaws, how many members to have, and who can be a member. Generally, while it is a nonprofit corporation, a mutual benefit corporation is not a charity. Because it is not a charity, a mutual benefit nonprofit corporation cannot obtain 501(c)(3) status. If there is a dispute as to how a mutual benefit nonprofit corporation is being operated, it is up to the members to resolve the dispute since the corporation exists to solely serve the needs of its membership and not the general public.

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