What does corporation mean? A definitive guide
By Indeed Editorial Team
Published 8 June 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When beginning a business, one of the first and most important steps is deciding how to structure it. There are several types of business structures, a common one being a corporation. When considering whether to form a corporation, there are some important factors to consider to determine if it's the right decision for your organisation. In this article, we explore what a corporation is, who owns one, the advantages of becoming a corporation and how to form one.
What does corporation mean?
To answer, 'What does corporation mean?', is simply a business entity that is separate from business owners and so acts as its own legal entity. Instead of being legally joined by its owners, a series of individuals who have shares in the organisation own the corporation. Typically, an individual or group of people creates a corporation with a shared goal in mind, which is typically to generate profit. There are also not-for-profit corporations, such as some charitable organisations.
What is a shareholder?
A shareholder is a person, company or institute that owns at least one share of a company's stock. The key limited liability element of a corporation means that the shareholders gain the benefits of the company's success, such as capital gains and increased stock valuations. They are not personally liable for the corporation's debt, but if the company loses money, the share price drops and the shareholders consequently lose money.
The shareholders may be those who formed the corporation, descendants of the company's founders and individual investors. Along with owning company stock, shareholders also hold a series of rights and responsibilities. They elect a board of directors who execute the corporation's business plan and oversee the organisation's daily operations and activities. They also hold the right to vote on key corporate and critical matters, inspect the company's books and records, attend annual meetings and sue the corporation for any misdeeds.
Related: How to become a stock broker
A corporation vs a business
Sometimes, the two terms are used interchangeably, as many businesses are corporations and vice versa, but the two can also be different from each other. A business is an enterprise that is formed to generate revenue. A corporation is often referred to as a 'legal person' in that it is designed to enable the collection of financial support from multiple people who cannot be held accountable for the corporation's debts. The two also often differ in terms of size. Businesses are typically smaller, while corporations are generally operating on a larger scale.
What are the advantages of becoming a corporation?
Before forming a corporation, it's important to consider the advantages of establishing a legally separate entity. The advantages of choosing a corporate structure can include:
Personal liability protection
Corporations typically provide more asset liability protection to their shareholders than any other entity type. For example, if a corporation is sued, the owners are not typically responsible for any debts or legal obligations. Personal liability protection is one of the main advantages involved in becoming a corporation and is a common reason many businesses decide to incorporate.
The amount of stock owned by an individual or business determines corporation ownership. This offers much more flexibility than other entity types, as the shareholder can decide how much stock they want to buy and when they want to sell. For example, if an owner wants to leave a company, they can simply sell off their stocks or transfer them to someone else. The selling of ownership shares can also make it easier for companies to raise money from investors.
Access to capital
Access to funding is another advantage for corporations that other entity types rarely have. Since most corporations sell ownership through publicly traded stock, they can generate funds by selling ownerships. This can be helpful in growing a business and for acting as a means of support for issues such as going bankrupt.
What are the disadvantages of becoming a corporation?
When deciding whether to incorporate, it's helpful to consider common challenges so you can make an informed decision. The incorporation process itself typically involves a lengthy application procedure that consists of following several formalities and protocols. There is generally a large amount of paperwork that determines and documents the details of the entire organisation. During the operations of a corporation, there are many regulations for maintaining a corporation status, such as following laws and documenting annual reports.
While it may be simple for established corporations to generate capital by selling shares, maintaining a corporation remains costly. When considering the advantages and disadvantages of running a corporation, it may be useful to consult a solicitor and accountant who are specifically skilled in the implications of forming a corporation.
How to form a corporation
Forming a corporation is a complex and lengthy operation, but these seven steps highlight the key stages of the process:
1. Choose a company name
Selecting a business name is an important first step when starting a corporation. When choosing a name, consider the pronunciation, what your company does and the chances of the name being relevant in the future. A corporate designation may be necessary in your name, such as 'Incorporated', 'Limited' or the abbreviated versions of these words. It is also essential to ensure that another registered company hasn't already claimed the name. If your name is too similar to another company's name or trademark, it is a good idea to re-evaluate your name.
Related: How to become a CEO in 5 steps
2. Appoint directors
Choosing the right company directors is crucial for business success. The owners of a company typically choose the corporation's directors, and in many cases, the owners themselves move into a director role. Directors are legally responsible for running the company and ensuring company accounts and reports are properly prepared. When appointing directors, it is advisable to construct a team that has a good balance of skills, experience, expertise and personal attributes. When starting a corporation, you may also want to appoint a company secretary, although this role isn't necessary for every corporation.
Related: 9 essential director skills
3. Identify who the shareholders are
As most corporations are limited by shares, the company consists of at least one shareholder. If there is only one shareholder, they own 100% of the company. There is no maximum number of shareholders, and the price of an individual share can be any value. You can also determine a low-value share to limit your shareholders' liability to a reasonable sum.
4. Determine people with significant control over the company
An individual who has significant control (PSC) is someone who owns or controls your business. PSCs are typically those who hold more than 25% shares in the company, more than 25% voting rates and the right to appoint or remove most of the board of directors. After identifying the PSCs, record their details on your company's PSC register. If you are unable to identify a PSC or cannot find one, it is important to alert GOV.UK of this through their official website.
5. Prepare and file documents agreeing on how to run the company
When registering your company, it's important to prepare a 'memorandum of association', which is a legal statement signed by shareholders and guarantors to mark their official agreement to form the business. Preparing 'articles of associate' is also part of registering your company. This document contains written rules about running the company that shareholders, directors and the company secretary agree to follow.
6. Make note of the records to be kept
When running a company, ensure you keep records about the company itself, along with financial and accounting records. It's important to research the specific details that your company may have to record, but these details generally include who the directors, shareholders and company secretaries are, the results of any shareholder resolutions, transactions when someone buys a share in the company and information on any loans. As previously noted, it is normally a requirement to keep a register of PSCs.
When it comes to keeping accounting records, this information can include debts the company is owed, all goods bought and sold and all money received and spent by the company. If necessary, you can hire a professional, such as an accountant, to help with your tax records.
7. Register your company
Lastly, officially register your company with Companies House. As you complete this step, your Corporation Tax registration is also complete. Once you officially register, your company gets a 'certificate of incorporation' which confirms its legal existence.
What is the liquidation of a corporation?
Once a corporation has fulfilled its objectives, you can end its legal existence by using the process of liquidation. While this can be voluntary, it may also be due the company's financial collapse. The corporation may appoint a liquidator who sells the company's assets. The liquidator also helps the corporation pay any remaining creditors and distributes possible leftover assets to the shareholders. If the corporation has unresolved issues, such as creditors who are unable to pay their bills, filing for bankruptcy is possible.
Explore more articles
- How to calculate the contribution margin ratio in a business
- What is cold calling?: A definitive guide (with advantages)
- What is planned preventive maintenance? (With benefits)
- What is a burn up chart? (Definition, uses and benefits)
- What is a Level 4 Certificate in Education and Training?
- How to measure digital marketing ROI (plus improvement tips)
- How to improve employability for graduates (with steps)
- What is a sprint review? (With key definitions and FAQs)
- What is knowledge base software and why is it important?
- What is encryption and what are some encryption types?
- How to make a successful full-time to part-time request
- What is a gathering requirements template? (Plus benefits)