Like other forms of business organizations, Corporations have features that distinguish them. The list below explores the common 8 characteristics of corporation. Some features are a source of advantages or disadvantages of a corporation. As an investor, assessing a corporation with respect to these features might help you make informed decisions. Furthermore, your knowledge of these features helps you discover how they will be altered in case a corporation is converted to LLC.
8 Characteristics of Corporation
1. Separate entity:
A corporation is a separate legal entity from shareholders. Corporations can operate separately from their owners and enjoy the rights of a natural human being. As artificial beings, they can own assets, enter contracts, sue and be sued, and get loans.
A corporation can own tangible and intangible assets like a natural person. A good example is Coca-Cola, which owns both tangible and intangible assets. Coca-Cola owns premises as tangible assets and patents as intangible assets.
Apple Inc. is an example of a corporation that sued a company responsible for hacking iPhones. This was an exercise of the corporation’s right to seu others.
2. Limited liability:
Shareholders are not personally liable for any debts the company has. A lawsuit against a corporation company is not effected to these shareholders in their personal capacity. However, shareholders fully enjoy the profits and dividends earned by the company depending on their shareholding proportions.
For example, Amazon was sued back in 2022 due to pregnancy discrimination. The company was alleged to have forced pregnant workers for unpaid leaves. This case was not effected on Jeff Bezos, the founder, or any other shareholder. The lawsuit targeted Amazon as a corporation.
3. Voting rights:
Corporations are formed and owned by shareholders. With public corporations, there may be an infinite number of shareholders. Voting in a corporation company is on the basis of one share, one vote. The more shares you have, the more control you have over the company and the decisions made.
In some cases, all shareholders do not necessarily vote. Instead, some delegate their voting rights to another shareholder. This is called proxy voting.
Corporations like Exxon Mobil usually use proxy voting in different decisions making processes. Proxy voting allows for free and fair decisions even in the absence of some shareholders.
4. Unlimited lifespan:
Unlike sole proprietorships and partnerships, where the owner’s death could lead to dissolution, corporations have a continuous life. Since a corporation is a separate legal entity from the owners, no single death can cause a dissolution. For instance, Apple Inc. still thrives strongly even without co-founder Steve Jobs. His death in 2011 did not directly impact the life of his company.
Dissolution of a corporation company can only happen when the board of directors decides to dissolve the company. Remember corporations like Washington Mutual (WaMu). Shareholders agreed to file for bankruptcy in 2008, when it was eventually overwhelmed by the global economic recession.
5. Professional management:
Shareholders may be able to vote and make decisions, but that does not mean they have to run the company’s day-to-day activities. The majority of corporations appoint professional managers to run daily business operations.
For instance, shareholders of Coca-Cola are investors who are not participants in the company’s active management. Instead, the company has professional chief officers, regional presidents and others. These run the company on behalf of shareholders.
6. Double taxation:
A corporation has to pay income tax on its profits. In addition, when dividends are paid to the investors, they attract income tax. This characteristic of corporations is one of their major disadvantages, especially to shareholders. It reduces shareholders’ disposable income from dividends.
To the corporation company, double taxation reduces the amount of profits reinvested. This is why corporations resort to external funding to finance their growth process.
7. The ability to acquire capital:
As a legal entity with the rights of a person, corporations can acquire capital through loans from banks. They can also acquire capital by issuing stocks to the public, where investors can invest.
Corporations invite investors to come and buy shares with them. These investors can be individuals or other established companies. They bring in a substantial amount of capital to finance different business activities of a corporation.
Take, for instance, the investors’ profile of Google. It has individual investors like you and established companies like The Vanguard Group.
8. Transferability of shares:
If you are a shareholder in a corporation, you can sell part or all of your shareholding. This applies to companies that have invested in the stocks of a corporation. You can sell these shares at a profit or loss, depending on their performance in the stock market.
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