What is a Corporation?

A corporation is a legal entity in which the assets and liabilities of this entity are separated from those of the owners.¹ In other words, the liabilities of a corporation cannot be fulfilled by selling the assets of the shareholders of the corporation.

Features of a Corporation

In a corporation, the stake of the shareholder is limited to the capital invested. If a corporation incurs a loss and cannot meet its liabilities, the owners’ assets cannot be used. In a sole proprietorship, the owners’ assets are also tied to the business.

Setting up a corporation can be complex, and high set-up costs may be incurred. A corporation may be public or private. The corporation needs to have an article of incorporation that contains details of the corporation.

The body managing the day-to-day affairs of a corporation is generally separate from the group providing oversight. Independence of the Board of Directors from the management allows better supervision and helps preserve the interest of the shareholders. The corporation needs to report financial performance and cater to the queries of shareholders through meetings.

Example

Uber was a private corporation prior to its Initial Public Offering (IPO) launch in May 2019. The company’s shares were not available to the public until then, and most of the stake was held by owners and private equity funds.² After going public in 2019, shares of Uber can now be traded in public exchanges.³ The company now must adhere to other requirements set out by the exchange, including disclosing financial information and generating annual reports.

References

1.  “Corporation.” Investopedia. https://www.investopedia.com/terms/c/corporation.asp#

2. “Companies are Funding Uber and Lyft.” Investopedia. https://www.investopedia.com/articles/markets/011516/companies-are-funding-uber-and-lyft.asp

3. “Uber IPO Values Ride-Hailing Giant at $82.4 Billion.” NY Times. https://www.nytimes.com/2019/05/09/technology/uber-ipo-stock-price.html

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