Corporation Business: What it is, Types, How to incorporate one, Pros and Cons

Unlock the potential of corporation businesses with insights into its types and advantages.
Business Loan
5 min
21 February 2024

In the ever-evolving landscape of business entities, the term "corporation business" stands as a significant player, offering distinct advantages and considerations. This comprehensive guide aims to demystify the concept, exploring what a corporation is, its common types, and the associated advantages and disadvantages.

What is a corporation?

At its core, a corporation in the business world is a legal entity distinct from its owners, known as shareholders. This section navigates through the intricacies of corporations, shedding light on their unique structure, ownership dynamics, and the legal framework that governs their existence. Whether discussing publicly traded giants or closely held entities, understanding the fundamental attributes of a corporation is essential for both entrepreneurs and investors.

How does a corporation come into existence in India?

A corporation is formed when a group of shareholders invests money in exchange for shares of an organisation to achieve a common objective. These shareholders become the owners of the corporation. The objectives may be profit-driven or non-profit, though many corporations focus on maximising returns for their shareholders. All corporations are governed by the Companies Act, 2013, and their profits are taxed under the Income Tax Act of India, 1961.

What are the common types of corporations?

A corporation can be established by either a single shareholder or multiple shareholders who come together to achieve a common objective. It can be set up as either a for-profit or a not-for-profit entity.

Most corporations are for-profit, aiming to generate revenue and provide returns to their shareholders based on their ownership percentage in the company.

Not-for-profit entities, on the other hand, fall under charitable organisations and are focused on specific social causes, such as education, religion, science, or research. Instead of distributing profits to shareholders, these organisations use their revenues to further their mission.

The three main types of business incorporations are:

  1. C Corporation
    A C Corporation is the most common type of incorporation and shares most of the characteristics of a corporation. Owners receive profits and are taxed individually, while the corporation is taxed as a separate business entity.
  2. S Corporation
    An S Corporation is formed in the same way as a C Corporation but differs in terms of ownership limits and tax treatment. It can have up to 100 shareholders and is not taxed separately; profits and losses are passed through to shareholders and reported on their personal income tax returns.
  3. Non-profit corporation
    This structure is typically used by charitable, educational, or religious organisations that operate without the aim of generating profits. Non-profits are exempt from taxes, and any revenue, donations, or contributions are retained within the organisation to support operations, growth, or future initiatives.

How do corporations work?

Before a corporation can begin its operations, it must appoint a board of directors. The members of this board are elected by shareholders during the annual general meeting. Each shareholder has one vote per share and is not required to be involved in the day-to-day management of the corporation. However, shareholders can be elected to serve on the board of directors or as executive officers.

The board of directors consists of individuals chosen to represent the shareholders. They are responsible for making significant decisions that affect the shareholders and for establishing policies that guide the corporation's management and daily operations.

Board members have a duty of care to the shareholders and must act in their best interests as well as those of the corporation.

What are the advantages and disadvantages of a corporation?

Examining the benefits and drawbacks of incorporating a business, this section provides a nuanced perspective for decision-makers. Here’s a detailed list of the pros and cons of a corporation business:

Advantages:

  1. Limited liability
    Shareholders enjoy limited liability, protecting their assets from the business's debts and legal obligations.
  2. Access to capital
    Corporations can raise capital by issuing stocks, attracting investors and facilitating growth through additional funds.
  3. Perpetual existence
    The corporation exists independently of its owners, ensuring continuity even if shareholders change or pass away.
  4. Transferable ownership
    Shares of stock can be bought and sold, allowing for easy transfer of ownership and liquidity for shareholders.
  5. Professional image
    Corporations often convey a professional image, instilling confidence in customers, partners, and investors.

Disadvantages:

  1. Complexity and formalities
    Corporations require extensive paperwork, formalities, and compliance with regulatory requirements, leading to increased administrative burdens.
  2. Double taxation
    C Corporations may face double taxation, where profits are taxed at the corporate level and dividends at the individual level.
  3. Cost of formation
    Establishing a corporation involves significant costs, including legal fees, filing fees, and ongoing compliance expenses.
  4. Limited control for shareholders
    Shareholders may have limited control over decision-making, with major choices often made by a board of directors.
  5. Risk of corporate veil piercing
    In certain situations, courts may "pierce the corporate veil," exposing shareholders to personal liability, especially if the corporation is deemed a mere extension of its owners.

Understanding these advantages and disadvantages is essential for entrepreneurs so business leaders can make informed choices aligned with their organizational objectives.

How does a corporation dissolve?

A corporation continues to exist until there is a change in its charter or it has achieved its purpose. When it is time for a corporation to cease operations, a process called liquidation is carried out, managed by a liquidator.

During liquidation, the corporation's assets are sold, and the proceeds are used to settle any debts with creditors. Any remaining funds are distributed to shareholders. Involuntary liquidation typically occurs when creditors of an insolvent or bankrupt company initiate the process.

Explore the possibilities of incorporating your business with the support of Bajaj Finserv Business Loan. Our flexible financing solutions are tailored to empower your corporate journey. Seize the opportunity to propel your corporation forward with the financial backing it deserves!

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Frequently asked questions

What is the meaning of corporation in business?

In the business context, the term "corporation" refers to a legal entity separate from its owners, offering distinct advantages such as limited liability and perpetual existence.

What are corporation examples of business?

Prominent examples of corporations include multinational giants like Apple Inc., Google, and Coca-Cola, showcasing the diverse scale and industries in which corporations operate.

Why is it called a corporation?

The term "corporation" derives from the Latin word "corpus," meaning body. It signifies a legal body distinct from its owners, emphasizing its separate legal identity.

What is corporation and Pvt Ltd?

"Pvt Ltd" refers to a private limited company, a specific type of corporation. While both provide limited liability, a private limited company has restrictions on share transfer and a capped number of shareholders.

Are corporations and companies the same?

Corporations and companies are often used interchangeably, but technically, a corporation is a specific type of company with legal rights distinct from its owners, including limited liability and perpetual existence.

What is the purpose of a corporation?

The purpose of a corporation is to conduct business activities, generate profits for its shareholders, and achieve specific objectives as outlined in its charter. Corporations can also pursue non-profit goals, depending on their structure.

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