The Corporate Form of Organization
¾ Corporation is a legal entity that is separate and distinct from its owners. A
corporation has the same duties and responsibilities as a person. It must respect laws
and it must pay income tax. Two ways that corporations are classified are based on
purpose and by ownership. A corporation may be organized for the purpose of
making a profit, or it may be not-for-profit. Classification by ownership
distinguishes between publicly-held corporations and privately-held corporations. A
publicly held corporation may have thousands of shareholders. In contrast, a
privately held corporation, often called a closely held corporation, usually has only a
few shareholders. It does not offer its shares for sale to the general public. A crown
corporation is similar to a privately held company except that it is owned by the
Characteristics of a Corporation
¾ Separate Legal Existence: the corporation acts under its own name rather than in the
name of its shareholders. The acts of the owners do not bind a corporation unless the
owners are also duly appointed agents of the corporation.
¾ Limited Liability of Shareholders: creditors only have access to corporate assets to
have their claims repaid to them. The liability of shareholders is normally limited to
their investment in the corporation. There is no legal claim on the personal assets of
the owners unless fraud has occurred.
¾ Transferable Ownership Rights: ownership of a corporation is held in capital shares.
Shareholders may dispose of part of all of their interest in a corporation simply by
selling their shares. The transfer of shares is entirely decided by the shareholder. The
transfer of ownership rights is a transaction between individual owners.
¾ Ability to Acquire Capital: issuing shares is a method to obtain capital. Buying
shares in a corporation is attractive as there is limited liability, easy transferability,
and requires small amounts of money.
¾ Continuous Life: most corporations have an unlimited life. Since it is a separate legal
entity, its continuance as a going concern is not affected by the shareholders.
¾ Corporation Management: shareholders legally own the corporation. They manage
the corporation indirectly through a board of directors they elect.
¾ Government Regulations: a federally incorporated corporation can do business in
every province and territory. A provincially incorporated corporation, however, must
obtain a licence to do business in other jurisdictions. Federal and provincial laws
specify the requirements for issuing shares, the permitted distributions of earnings to
shareholders, and the effects of retiring shares. Securities laws govern the sale of
share capital and the disclosure of financial information to the general public.
Corporations must also comply with the reporting requirements of exchanges.