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Corporations

(corporations)





A corporation is a legal entity (distinct from a natural person ) that often has similar rights in law to those of a natural person. Civil law systems mayrefer to corporations as "moral persons;" they may also go by the name "SA" (anonymous society) or something similar, dependingon language (see below).

In modern practice, many people use the word "corporation" narrowly to refer to a commercial entity set up in accordance with a governmental framework. However, churches, interest-groups (both canform as not-for-profit corporations or canexist as voluntary associations ), cities and townships (often chartered as public corporations ), among others, may also have historicallylengthy corporate identities.

Contents

General

Legal status

Within the official framework, a corporation, or in some jurisdictions a company, forms alegal, artificial entity with or without shareholders . (Humans, trusts , other corporations or other legal entities can hold shares .) When no stockholders exist, a corporation may exist as a "non-stock corporation", a"membership corporation", or similar — this second type of corporation counts as a not-for-profit corporation . In either category, thecorporation comprises a collective of individuals with a distinct legalstatus and with special privileges not vouchsafed to ordinary unincorporated businesses, to voluntary associations , or to groups of individuals. Corporations receive a charter from a state , and become regulated by the laws enacted by that state. The law of the state inwhich a corporation operates (if different from the state in which it originates) will generally regulate its activities.

Certain jurisdictions do not allow the use of the word "company" alone to denote corporate status, since theword "company" may refer to a partnership or to a sole proprietorship, oreven, archaically, to a group of not necessarily related people, (e.g. those staying in a tavern.)

Some of the designations used to signify corporation status that one may (in some states) adopt only with state sanctioninclude:

  • AG (Aktiengesellschaft - German: "stock corporation")
  • Corporation (Corp.)
  • GmbH (Gesellschaft mit beschränkter Haftung - German: "Company with limited liability")
  • Incorporated (Inc.) (which has meanings that vary widely from one country to another)
  • Incorporation (notably in New Zealand )
  • Limited (Ltd.)
  • No Liability (NL)
  • Proprietary (Pty) (notably in Australia )
  • Public limited company (plc or PLC) (notably in the United Kingdom )
  • Publicly Listed Company (Plc.)
  • S.A. (in French Société anonyme; in Spanish sociedad anónima - "anonymous society")
  • S.A.p.A. (Società in Accomandita per Azioni)
  • S.p.A. (Società per Azioni - Italian: "Shares-based Society")
  • Unlimited

Some jurisdictions require that one of a list of terms or abbreviations appear in the corporate name. Generally speaking, anycorporation, whether domestically created or foreign (from another jurisdiction) must register in order to conduct business in that jurisdiction. As part of this registration, it must designate theprincipal addresss of the corporation, i.e. where to contact it in the event of legal process.

The law typically views a corporation as a fictional person, a legal person, or a moral person (asopposed to a natural person ); United States law recognises this as corporate personhood . Under such a doctrine (obviously a legal fiction ), a corporation enjoys many of the rights and obligations of individual citizens , such as the ability to own property , sign binding contracts , pay taxes , have certain constitutional rights, and otherwise participate in society . (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions,for example, a corporation cannot vote.)

Typically a board of directors governs a corporation; thatboard has a fiduciary duty to look after the interests of thecorporation. The corporate officers -- such as the CEO , president , treasurer , and other titled officers -- manage the affairs of the corporation.

Benefits of forming a corporation

The most salient features of incorporation include:

(1) Limited Liability. Unlike in a partnership, stockholders of a corporation hold no liability for the corporation's debts and obligations. As a result their "limited" potential losses cannot exceedthe amount which they paid for the stock. Not only does this allow corporations to engage in risky enterprises, but limited liability also forms the basis for trading in corporate stock. Without the limitationon the amount that an investor can lose, the time and effort required to determine whether the stock could wipe the investor outwould render the stock market very illiquid (as one can observe in the very illiquid market for partnership interests). A lendercan, however, require a personal guarantee on a loan to a corporation, thus introducing personal liability.
(2) Perpetual Lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders,officers or directors. This allows for stability of capital , which thus becomesavailable for investment in projects of a larger size and over a longer term than if the corporate assets remained subject todissolution and distribution. This feature also had great importance in the medieval period, when land donated to the Church (a corporation) would not generate the feudal fees that a lordcould claim upon a landholder's death. In this regard, see Statute of Mortmain .

Origins

Early corporations of the commercial sort -- such as the Dutch East India Company -- formed under frameworks (set up by governments of states ) to undertake tasks which appeared too risky ortoo expensive for individuals or governments to embark upon. Such corporations came to play a large part in the history of corporate colonialism .

Kenneth Pomeranz , aneconomic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war ) accounts for the development of this economic structure in Europe but not in China or in the MiddleEast .

The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun , Sweden , reportedly obtained a charter from King Magnus Eriksson in 1347 .

Non-profit organizations

In modern economic systems, the corporate conventions of governance commonlyappear in a wide variety of business and non-profit activities. Though the laws governing these creatures of statute often differ, thecourts 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 resembleeach other.

National features

United States

In the United States several corporate forms exist; the name of"corporation" generally applies to a business , run for profit, to which one of the states of the United States (or othergovernmental body with that power, including Congress and Puerto Rico) has granted a corporate charter. The federal government of the United States usually doesnot grant corporate charters to businesses (exceptions include public corporations such as the Post Office and Amtrak ). American corporations typically charter as a Delaware Corporation in Delaware , which charges no tax on activities outside the state and has courts experienced in commercial law . Corporations set up for privacy or asset protection often charter in Nevada , which allows settingthem up with no record of who owns them.

Historically, most U.S. states issued charters for fixed lengths of time (for example, a manufacturing corporation mightreceive a charter good for forty years), and only by an act of the legislature. In theory, a limited charter forced corporationsto remain accountable to government (i.e. to the community) for thespecial privileges granted to them. Investors protested that it actually led to unhealthy amounts of political payoffsand graft. Most states now charter unlimited-term corporations for a small fee, and possibly for a yearly tax.

Canada

In Canada both the federal government and the provinces have corporate statutes, and thus a corporation may have a provincial or a federalcharter. Many older corporations in Canada stem from Acts ofParliament passed before the introduction of general corporation law.

Related topics: Preferred stock , Corporate governance , Bylaw , Delaware corporation , Commercial law , Stock certificates

Multinational Corporations

Following on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations : growing beyond nationalboundaries to attain sometimes remarkable positions of power and influence in the process of globalising .

The typical "transnational" or "multinational" may fit into a web of overlapping ownerships and directorships, with multiplebranches and lines in different regions, many such sub-groupings comprising corporations in their own right. Growth by expansionmay favour national or regional branches; growth by acquisition or merger can result in a plethora of groupings scattered around and/or spanning the globe, withstructures and names which do not always make clear the structures of ownership and interaction.

In the spread of corporations across multiple continents, the importance of corporate culture has grown as a unifying factor and a counterweight to local national sensibilities andcultural awareness.

Corporate taxation

In the United States

In the United States business corporations owe taxes according to several different categories. The United States Internal Revenue Service classifies organizations asassociations (taxable as corporations), partnerships (not limited to common-law partnerships) or trusts ("ordinary trusts"). [see26 CFR §§301.7701-2 through 301.7701-4]

The United States federal taxation system recognises two types of corporations for taxation purposes:

C-Corp - The most commonform of corporation, the C-corporation has few ownership restrictions and must pay corporate taxes ; all publicly-traded corporations have C-corporation status. C-corporations pay incometaxes just as an individual does, and C-corporations do not receive a deduction on dividends they pay to stockholders. This leadsto the so-called "double-taxation" of corporate profits: a given profit becomes subject to income tax twice, once at thecorporate level, as an item of income, and once at the stockholder level, as a dividend .

S-Corp - Commonly used by small business proprietors, the S-corporation pays no corporate taxes , but instead passes profits and losses directly to its owners(the stockholders) who declare such profits and losses as part of their personal income taxes ). In this manner S-coporations resemble partnerships, although some subtle differences in taxationexist. As a result, S-corporations do not become subject to the "double-taxation" that C-corporations enjoy. However, not allcorporations qualify for S-corporation treatment. An S-corporation must generally have no more than 75 stockholders, all of them natural persons (not other corporations or entities), and all of themresiding in the United States; moreover, the S-corporation can only issue a single class of stock.

Other related types of commercial entity

Partnerships, limited partnerships, and limited liability partnerships

A partnership comprises a contractual agreement between individuals and/or corporations which share profits and losses. It resembles a sole proprietorship , but it has multiple members, each calleda "partner". A partnership does not constitute a separate entity and the partners all retain liability for the debts of eachfellow-partner (if contracted to on behalf of the partnership). Usually a partnership will not survive the death of one of thepartners (though it may undergo reorganization at that time).

A partnership can have general partners and limited partners (also known as "silentpartners"). General partners retain liability for all of the debts and obligations of the partnership. Limited partners, on theother hand, retain liability only for the amounts they have specifically agreed to contribute to the partnership pursuant to thepartnership agreement.

A limited liability partnership (LLP) comprises a partnership composed entirely of limited partners withoutany general partner. For historical reasons most U.S. jurisdictions restrict limited liability partnership to associations oflearned professionals such as lawyers and doctors. However, thisrestriction has become fairly meaningless, since a limited liability company can achieve the same legalresult.

Limited liability company

The limited liability company (LLC) resembles a partnership in that it provides a very flexible structure. A limited liability company hasmembers, rather than partners; and an operating agreement (rather than a partnership agreement) governs its activities. Otherwisean LLC very much resembles a partnership in that the members can contractually arrange in the operating agreement for themanagement and economic provisions that they wish.

Many lawyers and businesspersons prefer the limited liability company formof taxation because of its extreme flexibility and favorable tax treatment.

Business trusts

One other type of business entity can exist: the business trust , most often used as a vehicle for investment purposes. Only a few jurisdictions allowfor the creation of business trusts, most notably Massachusetts ; many mutual funds function as Massachusetts business trusts. In many jurisdictionsthe business trust has become popular as a vehicle for investing in realestate , forming real estate investmenttrusts or REITs (pronounced reets).

Taxation of non-corporate entities

Since 1996 , United States partnerships and limited liability companies have had theright to elect whether the United States government will treat them as corporations or as "flow-through" entities under the IRS ' check-the-box regulations (see form8832). The income tax assessment process does not treat a flow-through entity as a person for income tax purposes; instead itdivides its income and loss (and every other tax attribute) among its partners, who report them proportionately to the IRS. Somelimits exist on an entity's ability to elect flow-through treatment: most importantly, a publicly-traded company cannot electflow-through treatment; in practice this means that publicly traded corporations remain subject to a more stringent tax régimethan do closely-held companies.

Quotes

  • You never expected justice from a corporation did you? They have neither a soul to lose nor a body to kick. ---- Lord Thurlow
  • An ingenious device for obtaining individual profit without individual responsibility.-- "Corporation" as defined by Ambrose Bierce in The Devil's Dictionary
  • The opinion of the Court, after mature deliberation, is that this [a corporate charter] is a contract, theobligation of which cannot be impaired without violating the Constitution of the United States. -- Chief Justice John Marshall , Dartmouth College v. Woodward ( 1819 ).

See also

External links


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