Corporation - What is a corporation?

A corporation is a legal entity that is distinct from its owners. It’s a body of persons authorized by law to act as one person, and has rights and liabilities that are separate from the individuals who form the corporation.

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Corporations are created by the Royal Charter, state or common law. These legal entities are established as separate legal bodies from their members and have their own distinct rights and responsibilities. 

For this reason, corporations are frequently referred to as “legal persons”. This means corporations can enter into contracts, borrow and loan money, own assets, sue and be sued, pay taxes and file or face legal lawsuits, just like individuals.

Corporations can be found in many forms, but most are used to conduct business. The most important type of corporation is the registered company statute, or common law. Corporations also pay corporation tax in the UK.

Features of corporations

There are four core characteristics that typically define a business corporation:

• Transferable shares

• Centralised management under a board structure

• Limited liability

• Separate legal existence

Transferable shares 

Put simply, a share is a percentage of ownership that a shareholder in a corporation holds. A shareholder is able to sell or transfer the shares they have in a corporation as long as the transfer of shares complies with any signed shareholder agreements. When there are multiple shareholders, a signed written agreement concerning the transfer of shares must be in place.

Structure

In corporations, shareholders will annually select a board of directors. This board will then oversee the management of the corporation’s day-to-day operations. In their role, they should make efforts to ensure that the corporation’s business plan is followed. 

Board members aren’t responsible for the corporation’s debts per se, but they still have a duty to take care of the corporation. Neglecting this responsibility as a board member may incur personal liabilities. 

Limited liability

One critical feature of contemporary corporations is their limited liability. This means that in the case of the corporation failing, shareholders stand only to lose their investment and employees stand only to lose their jobs. Shareholders are therefore not personally liable for debts still owed to the corporation's creditors.

Separate legal existence

By law, corporations are recognised as having rights and responsibilities, and can be referred to as “legal persons”. This means that corporations can exercise human rights against real individuals and the state, and they can be held responsible for human rights violations. They can even be found guilty of criminal offenses, such as fraud and manslaughter.

Liquidation of corporations

Corporations can exist indefinitely. Once a corporation has fulfilled its objectives, its legal life can be terminated through a process of liquidation. The corporation may appoint a liquidator who sells the assets the corporation owns, helps it pay any creditors it still has and distributes any remaining assets to the shareholders.

When this happens, the corporation essentially ‘dies’ and then ceases to exist.

Corporations can go into liquidation either voluntarily or involuntarily. Voluntary liquidation may happen once the corporation’s objectives have been met. Involuntary liquidation can happen for various reasons, but can often be triggered by the corporation’s creditors, leading to the bankruptcy of the corporation.