Nature of a Corporation (part A)
by
Charles Lamson
Corporations have become a widely used form of business organization. No matter what the size of a business, a corporation may be formed to run it. Because of the variety of uses to which corporations may be put, there are different types of corporations. They are also classified by the state of incorporation because, as an entity of the state, its laws of incorporation govern them.
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Classification by Purpose
Corporations may be classified according to their purpose or function as public or private.
Public Corporations
A public corporation is one formed to carry out some governmental function. Examples of public corporation include a city, a state university, and a public hospital. The powers and functions of public corporations may be much greater than those of private corporations conducted for profit. Public corporations may, for example, have the power to Levy taxes, impose fines, and condemned property. Public corporations are created by the state primarily for the purpose of facilitating the administration of governmental functions.
Some public bodies, such as school boards, boards of county commissioners, and similar bodies, are not true public corporations but have many similar powers. Such powers include the right to sue and be sued; the power to own, buy, and sell property; and the power to sign other contracts as an entity. These bodies are called quasi-public corporations, quasi meaning "as if" or "in the nature of."
Private Corporations
Private corporations are those formed by private individuals to perform some nongovernmental function. They in turn and include:
Not-for-Profit Corporations. a not-for-profit corporation is one formed by private individuals for some charitable, educational, religious, social, or fraternal purpose. This corporation is not organized for profit; does not distribute income or profits to members, officers, or directors and usually does not issue stock. As a legal entity like any other corporation, it can sue and be sued as a corporation, buy and sell property, and otherwise operate as any other corporation. A person acquires membership in a not-for-profit corporation by agreement between the charter members in the beginning and between the present members and new members thereafter.
Profit Corporations. A profit corporation is one organized to run a business and earn money. In terms of numbers and importance, stock corporations organized for profit constitute the chief type. Certificates called shares of stock represent ownership in a stock corporation. The number of shares of stock owned and the charter and the bylaws of the corporation determine the extent of one's rights and liabilities.
A profit corporation that has a very small number of people who own stock in it is called a close corporation or a closely-held corporation. Because of the small number of stockholders, they normally expect to be and are active in the management of the business.
Very close corporations choose to be designated Subchapter S corporations for federal income tax purposes. Unlike other corporations, a Subchapter S corporation files only an information tax return. It does not pay corporate income tax. The owners report the profit of the corporation as income on their personal income tax returns. This results in tax savings. The corporation's profits are not taxed twice once when shown on a corporate tax return and the second time when shown as income from the corporation to the owners on their personal tax returns.
Classification by State of Incorporation
Corporations may be classified depending on where they were incorporated. A corporation is a domestic corporation in the state where it received its initial charter; it is a foreign corporation in all other states. If Incorporated in another country, a corporation may be referred to as an alien corporation. The corporation can operate as a foreign corporation in any other state it chooses as long as it complies with the legislation or other requirements of the other state.
Formation of a Corporation
One who acts as the promoter usually takes the initial steps of forming a corporation. A corporation can be organized in any state the promoter chooses. A lot of preliminary work must be done before the corporation comes into existence. The incorporation papers must be prepared, a registration statement may need to be drawn up and filed with the Securities and Exchange Commission (SEC) and the appropriate state officials, the stock must be sold, and many contracts must be entered into for the benefit of the proposed corporation. Filing with the SEC is not required in the case of smaller corporations.
Minor defects in the formation of a corporation may generally be ignored. In some instances, though, the defect is of a sufficiently serious character that the Attorney General of the state that approved the Articles of Incorporation on the corporation may obtain the cancellation or revocation of such articles. In other cases, the formation of the corporation is so defective that the existence of a corporation is ignored, and the persons organizing the corporation are held liable as partners or joint ventures.
*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 409-411*
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