Corporations: A Deep Dive into Definition, Differences, and Business Features

Embarking on exploring corporations, this blog delves into the complex world of business entities, focusing on the fundamental question: What is a corporation? It carefully examines the definition of corporations, breaks down subtle differences, and sheds light on the unique features shaping their business landscape. This journey unravels the intricate web that defines corporate structures. This analysis is valuable for entrepreneurs seeking strategic insights and curious minds wanting to understand corporation business nuances. Prepare for a formal and detailed examination beyond the surface, offering a comprehensive understanding of these crucial entities in the business world.

What is a Corporation?

In India, a corporation is a business entity with its legal identity distinct from its owners. This unique status allows the corporation to take legal action or be subject to it in its name. It's an association of individuals formed for business purposes, characterised by a perpetual existence and a common seal.

One key feature is limited liability, meaning members are only responsible for the unpaid part of their shares. Members aren't obligated to contribute beyond this amount in case of bankruptcy or insolvency, safeguarding their personal assets.

What are the Most Common Types of Corporations?

Corporations manifest in diverse forms, categorised by ownership, liability, special status, and control.

Based on Ownership

• One Person Company (OPC): Offers sole proprietorship within a corporate structure.
• Private Limited Company: Restricts shareholders, fostering a controlled ownership model.
• Public Limited Company: Opens ownership to the public, inviting external investment.

Based on Liability

• Company Limited by Shares: Implies shareholder liability limited to unpaid shares.
• Company Limited by Guarantee: Involves predetermined liabilities, often in non-profit contexts.
• Unlimited Company: Lacks limitations on member liabilities.

Based on Special Status

• Government-Owned Corporation: State-controlled entities with public interests.
• Foreign Company: Operates internationally, often with subsidiaries abroad.
• Section 8 Company: Focuses on non-profit objectives for social welfare.
• Public Financial Institution: Primarily engages in financial services for the public.

Based on Control

• Holding Company: Exercises control over subsidiaries.
• Subsidiary Company: Operates under the control of a holding company.
• Associate Company: Shares intertwined interests with another company.

Listed, Unlisted, and Dormant Corporations: Classifications based on stock exchange status and activity levels.

How do Corporations Operate?

Corporations are run by appointing a Board of Directors through shareholder elections during annual general meetings. Shareholders are entitled to one vote per share and are not required to be involved in daily operations. However, they may be elected to the board. The elected board plays a crucial role in deciding significant issues affecting shareholders. They are responsible for creating policies and guiding the corporation's management and operations. The elected board members are obligated to act in the corporation's and the shareholders' best interests, bound by a duty of care. This complex structure ensures corporations operate in a balanced and effective manner.

Legal Requirements

Now that you know what a corporation in business is, you must understand the legal requirements to form one. Ideally, it should have at least two shareholders, two directors (at least one of which should be an Indian resident), a valid corporation name and registered office, and capital. Moreover, the authorised director must have a Class 3 Digital Signature Certificate (DSC) to apply for corporation registration and attest the required documents and forms.

How is a Corporation Formed?

1. Name Check: Ensure the chosen name complies with the Companies Act 2013 and Companies (Incorporation) Rules, 2014 guidelines.
2. Pre-Registration Documents:

• Obtain Digital Signature Certificates (DSC).
• Secure Director Identification Number (DIN).
• Prepare a Memorandum of Association (MoA) and Articles of Association (AoA).

1. Select Business Type: Choose from private limited, LLP, partnership firm, sole proprietorship, one-person company, etc.
2. MCA Portal: Create a user ID on the Ministry of Corporate Affairs (MCA) portal.
3. Document Submission: Submit the relevant documents through the MCA portal.
4. Certificate of Incorporation: Receive the Certificate of Incorporation upon successful processing.

What are the Benefits of Incorporation?

Forming a corporation offers numerous advantages.

1. By establishing a separate legal entity, owners can conduct business, enter contracts, pay taxes, and access tax benefits.
2. The corporation's continuity remains unaffected by the death or incapacity of stockholders, facilitating charter adjustments.
3. Owners enjoy limited liability, shielding personal assets from business-related debts.
4. Publicly held corporations can sell individual shares without stockholders' approval.
5. Corporations can efficiently source funds by issuing bonds and selling stocks. This structure allows owners to delegate operational responsibilities to professional management, ensuring effective production while benefiting from diverse financial opportunities.

What is the process of Dissolving a Corporation?

The life of incorporation lasts until its charter changes or it achieves the purpose of its existence. A liquidator facilitates the process of liquidation to serve the transition. These are the steps involved:

• The owners voluntarily decide to cease operations or are forceful due to the business’s financial collapse.
• The company appoints a liquidator to sell the corporation’s assets.
• The company clears its creditors’ dues and distributes the remaining amount to shareholders.
• If these steps do not resolve the situation, the company files for bankruptcy.

Distinction between a Limited Liability Company and a Corporation

Let’s look into the differences between a corporation and a company (LLC):