Corporation: It’s nature and characteristic; the uses and purposes of incorporation
Introduction . A corporation is a legal entity that exists under an authority approved by the state law. A corporation has its own identity, separate from its stockholders or owners. They can be sued, entered in to contracts, buy or sell real estate or property, or even break the law. A corporation is treated as a “person” with most of the privileges and duties of a real person.
Its nature and characteristics
To be recognized as a corporation, a business must file an submission that contains the corporation’s articles of incorporation (charter) with the State, pay an incorporation fee, and be approved by the State. Once the approval is received, the corporation must progress with its regulations. Organization costs, including legal charges, underwriters’ charges for stock and bond issues, and incorporation fees, are recorded as an intangible asset and reimbursed over a period of time not to exceed 40 years.
Ownership in a corporation is represented by stock certificates, which is why the owners are called stockholders. Stockholders have the right to vote for the members of the Board of Directors and any other matters requiring stockholders action, receive bonuses when authorized by the Board of Directors and have first right of denial when extra shares are issued, in so doing allowing the stockholder to preserve the same ownership percentage of the company before and after the new shares are issued (called a pre?emptive right); and share in assets up to their investment, if the company is liquidated (Characteristics of corporation, cliff notes,. Houghton Mifflin Harcourt)
Characteristics of a corporation
As a corporation is possessed by shareholders and managed by employees, the sale of stock, death of a stockholder, or incapability of an employee to does not affect the continuous life of the corporation. Its contract may limit the corporation’s life although the corporation may continue if the contract is extended.
2) Limited liability
The responsibility of stockholders is limited to the quantity each has invested in the company. Personal assets of stockholders are not available to creditors or investors seeking payment of amounts owed by the corporation. Creditors are limited to corporate assets for satisfaction of their rights.
Separate legal entity
A company is a separate legal entity as distinct from its members. A company is a separate legal entity as separate from its members, therefore it is separate at law from its shareholders, directors, promoters, and such is conferred with rights and is subject to certain duties and obligation.
Relative ease of transferring ownership rights
A person who purchase stock in a corporation is called a stockholder and receives a stock certificate representing the number of shares of the company she/he has purchased. Particularly in a public company, the stock can be easily transferred in part or total by the discretion of the stockholder. The stockholder demanding to transfer or sell the, stock does not require the support of the other stockholders to sell the stock. Likewise, a person or an entity wishing to purchase stock in a corporation does not require the approval of the corporation or its existing stockholders before purchasing the stock. Once a public corporation sells its preliminary offering of stock, it is not part of any subsequent transfers except as a record keeper of share ownership. Privately held companies may have some boundaries on the allocation of stock.
Investors in a corporation does not need to actively manage the business, as most corporations hire professional managers to run the business. The investors vote on the Board of Directors who are accountable for hiring management.
of capital acquisition
A corporation can obtain capital by selling stock or pledges. This gives a corporation a larger pool of resources because it is not limited to the resources of a small number of individuals. The limited accountability and comfort of shifting ownership rights makes it easier for a corporation to gain capital by selling stock, and the scope of the corporation allows it to issue pledges based on its name.
The sale of stock fallouts in government regulation to protect stockholders, the owners of the corporation. Government laws usually include the necessities for issuing stock and distributions to shareholders. The state securities laws also govern the sale of stock. Widely held companies with stock traded on exchanges are required to file their financial statements and additional informative disclosures with the Securities and Exchange Commission. Particular industries, such as banks, financial institutions, and gaming, are also subject to regulations from other governmental agencies.
The Uses and Purposes of Incorporation.
The normal state of things that with which the law is familiar, and to which its principles are conformed is individual ownership. With a single individual the law knows well how to deal, but common ownership is a source of serious and have several difficulties. If two persons carry on a partnership or own and manage property in common, problems arise, with which nevertheless the law can deal without calling in the assistance of fresh beginnings. But what if there are fifty or a hundred joint-owners? With such a state of facts legal principles and conceptions based on the type of individual ownership are narrowly competent to deal. How shall this crowd manage its common interests and affairs? How shall it dispose of property or enter into contracts? What if some be infants, or insane, or absent? What shall be the effect of the bankruptcy or death of an individual member? How shall one of them sell or otherwise separate his share? How shall the joint and separate debts and liabilities of the partners be satisfied out of their property? How shall legal proceedings be taken by or against so great a number? These questions and such as these are full of difficulty even in the case of private partnership, if the members are sufficiently numerous. The difficulty is still greater in the case of interests, rights, or property vested not in individuals or in definite associations of individuals, but in the public at large or in unspecified classes of the public. In view of these difficulties the aim of the law has been to reduce, the complex form of collective ownership and action to the simple and typical form of individual ownership and action. The law seeks some instrument for the effective expression and recognition of the elements of unity and permanence involved in the shifting crowd with whose common interests and activities it has to deal. There are two chief devices for this purpose, namely trusteeship and incorporation. The objects of trusteeship are various, and many of its applications have a source and significance that are merely historical. In general, however, it is used as a manner of overcoming the difficulties created by the powerlessness, uncertainty, or variety of the persons to whom property belongs. The property is deemed by the law to be vested, not in its true owners, but in one or more determinate individuals of full capacity, who hold it for safe custody on behalf of those uncertain, incapable, or countless persons to whom it in truth belongs. In this manner the law is enabled to adjust collective ownership to the simpler form of individual ownership. If the property and rights of a charitable institution or an unincorporated trading association of many members are held in trust by one or two individuals, the difficulties of the problem are greatly reduced. It is possible, however, for the law to take one step further in the same direction. This step it has taken, and has so attained to the conception of incorporation. This may be regarded from one point of view as merely a development of the conception of trusteeship. For it is plain that so long as a trustee is not required to act, but has merely to serve as a depositary of the rights of beneficiaries, there is no necessity that he should be a real person at all. He may be a mere fiction of the law. ( Jurisprudence-Sir-John-William-Salmon , pg 357) .And as between the real and the fictitious trustee there are, in large classes of cases, important advantages on the side of the latter. He is one person, and so renders possible a complete reduction of common to individual ownership; whereas the objections to a single trustee in the case of natural persons are serious and obvious. The fictitious trustee, moreover, though not incapable of dissolution, is yet exempt from the inevitable mortality that afflicts mankind. He embodies and expresses, therefore, to a degree impossible in the case of natural trustees, the two elements of unity and of stability which call for recognition in the case of collective interests. An incorporated company is a permanent unity, standing over against the countless and variable body of shareholders whose rights and property it holds in trust. It is true, indeed, that a fictitious trustee is incapable of acting in the matter of his trust in his proper person. This difficulty, however, is easily avoided by means of agency, and the agents may be several in number, so as to secure that safety which lies in a multitude of counsellors, while the unity of the trusteeship itself remains unaffected. We have considered the general use and purpose of incorporation. Incorporation is used to enable traders to trade with limited liability. As the law stands, he who ventures to trade in propriate personal must put his whole fortune into the business. He must stake all that he has upon the success of his undertaking, and must answer for all losses to the last farthing of his possessions. The risk is a serious one even for him whose business is all his own, but it is far more serious for those who enter into partnership with others. In such a case a man may be called upon to answer with his whole fortune for the acts or defaults of those with whom he is terribly associated. It is not surprising, therefore, that modern commerce has seized eagerly upon a plan for eliminating this risk of ruin. Incorporation has proved admirably adapted to this end. They who wish to trade with safety need no longer be so rash as to act in propria persona, for they may act merely as the irresponsible agents of a fictitious being, created by them for this purpose with the aid and sanction of the Companies Acts. If the business is successful, the gains made by the company will be held on behalf of the shareholders; if unsuccessful, the losses must be borne by the company itself. For the debts of a corporation are not the debts of its members. The only risk run by its members is that of the loss of the capital with which they have supplied or undertaken to supply the company for the purpose of enabling it to carry on its business. To the capital so paid or promised, the creditors of the insolvent cor- proration have the first claim, but the liability of the shareholders extends no further. The advantages which traders derive from such a scheme of limited liability are obvious. Nor does it involve any necessary injustice to creditors. Those who deal with companies know, or have the means of knowing, the nature of their security. The terms of the bargain are fully disclosed and freely consented to. There is no reason in the nature of things why a man should answer for his contracts with all his estate, rather than with a definite portion of it only, for this is wholly a matter of agreement between the parties.
The birth and death of legal persons are determined not by nature, but by the law. They come into existence at the will of the law, and they endure during its good pleasure. Corporations may be established by royal charter, by statute, by immemorial custom, and in recent years by agreement of their members expressed in statutory forms and subject to statutory provisions and limitations. They are in their own nature capable of indefinite duration, this being indeed one of their chief virtues as compared with humanity, but they are not incapable of destruction. The extinction of a body corporate is called its dissolution the severing of that legal bond by which its members are knit together into a fabricated unity. We have already noticed that a legal person does not of necessity lose its life with the destruction or disappearance of its corpus or bodily substance. There is no reason why a corporation should not continue to live, although the last of its occupants of the office. The essence of a body corporate consists in the animus of fictitious and legal personality, not in the corpus of its members. Members is dead, and a corporation sole is merely dormant, not extinct, during the interval between two successive. (Jurisprudence-Sir-John-William-Salmon, pg. 361)