Definition of Corporation

A corporation is a commercial entity whose capital is divided into shares of equal value that are tradable, owned by a number of shareholders that usually meets a minimum legal requirement. It enjoys an independent legal personality completely separate from its shareholders' personalities, meaning it has a separate financial liability and bears its obligations with its own funds. Shareholders' liability is limited to the value of their shares only, and their responsibility does not extend to their personal funds in case of company bankruptcy. It is managed by a board of directors elected by shareholders and is subject to strict supervision by competent authorities. It has the right to issue shares and bonds to the public and list them on financial markets.

Characteristics of Corporations

Corporations are distinguished by fundamental characteristics that differentiate them from other forms of companies:

• Legal Personality: Enjoys an independent legal entity completely separate from shareholders, giving it the right to enter contracts, litigate, and own property in its own name
• Limited Liability: Shareholders' responsibility is limited to the value of their shares only, not extending to personal funds in case of bankruptcy or losses
• Transferability: Shares are freely tradable through buying and selling, providing liquidity for investors and facilitating shareholders' entry and exit
• Divided Capital: Capital is divided into equal units called shares, facilitating fair distribution of ownership and profits
• Separate Management: Managed by a board of directors elected by shareholders, separating ownership from management and ensuring professional expertise
• Continuity: Enjoys continuous and permanent existence unaffected by death or withdrawal of shareholders, ensuring business stability
• Legal Oversight: Subject to strict laws and regulations governing its establishment, management, and financial disclosure to protect shareholders and the public

Types of Corporations (Public and Private)

Public Corporation: A company that offers its shares to the general public and trades on the stock exchange, allowing anyone to acquire its shares. Subject to strict oversight and committed to public financial disclosure.

Private Corporation: A company whose ownership is limited to a specific number of shareholders and does not offer shares to the public. Its shares are not publicly tradable and enjoys greater flexibility in management and confidentiality.

Establishment and Formation of Corporations

Establishing a corporation is a complex process requiring advance planning and adherence to strict legal procedures. This process begins with a clear investment idea and ends with a legal entity capable of conducting commercial activity. Founders need to understand legal, financial, and administrative requirements to ensure proper establishment and compliance with applicable laws:

1. Initial Preparation: Preparing feasibility studies and determining capital and founders
2. Document Preparation: Drafting the incorporation contract and company bylaws
3. Share Determination: Dividing capital and determining nominal share value
4. Share Offering: Inviting the public or founders to acquire shares
5. Obtaining Approvals: Applying to competent authorities for licenses
6. Legal Registration: Registering the company in the commercial register
7. Capital Deposit: Depositing a specified percentage of capital in the bank
8. Founding Assembly: Holding the first meeting to confirm establishment and elect the board of directors

Management Structure and Governance in Corporations

The management structure and governance in corporations consists of several hierarchical levels ensuring effective management and appropriate oversight of company operations:

General Assembly: Represents the supreme authority of shareholders and includes all shareholders, meets annually to make important strategic decisions such as electing the board of directors, approving financial statements, distributing profits, and amending the company's bylaws

Board of Directors: Consists of members elected by shareholders for a specific term, sets long-term strategies, oversees general performance, appoints executive management, and ensures protection of shareholders' interests and compliance with laws and regulations

Executive Management: Handles implementation of daily policies and decisions headed by the general manager or CEO, manages operational activities, develops detailed plans, and provides periodic reports to the board of directors on business progress and achieved results

Specialized Committees: Include audit committees that monitor financial systems, risk committees that assess and manage various risks, and compensation committees that determine senior management salaries, aiming to enhance internal oversight and transparency

External Auditor: An independent and neutral auditing firm that examines and reviews financial statements, ensures accuracy of financial data, and provides professional opinion on fair representation of the company's financial position

Oversight Mechanisms: Include preparing comprehensive periodic reports, mandatory public financial disclosure, compliance with international corporate governance standards, and subjection to oversight by competent regulatory authorities to ensure transparency and accountability

Shareholder Rights in Corporations

Shareholders enjoy fundamental rights that ensure protection of their investments and participation in company management:

• Profits: Receiving a share of distributed profits according to ownership percentage
• Voting: Participating in decision-making at general assemblies
• Election: Choosing board members and auditors
• Disclosure: Accessing financial statements and annual reports
• Priority: Priority right in acquiring new shares
• Trading: Freedom to transfer and sell shares
• Liquidation: Receiving a share of company assets upon liquidation

Advantages and Disadvantages of Corporations

Corporations have advantages and disadvantages that investors and founders must understand before making establishment decisions:

Advantages of Corporations:

• Limited Liability: Shareholders are not personally responsible for company debts, protecting their personal assets
• Ease of Capital Raising: Ability to sell shares to investors to finance growth and expansion
• Ownership Transferability: Shares are easily tradable without disrupting operations
• Continuity: Company continues operations despite ownership changes or owners' death
• Specialized Management: Separation of ownership from management ensures professional expertise
• Transparency: Disclosure requirements enhance trust and accountability

Disadvantages of Corporations:

• High Costs: Establishing and maintaining the company is more expensive than other structures
• Administrative Complexity: Subject to complex laws and intensive record-keeping requirements
• Loss of Control: Individual owners lose direct control over operations
• Legal Formalities: Need to follow specific procedures and hold periodic meetings
• Conflicts of Interest: Potential conflict between management and shareholders' objectives
• Market Fluctuations: Share prices affect investment value and company reputation

Profit Distribution in Corporations

Corporations typically distribute profits to shareholders through dividends, which are payments made from company earnings. The board of directors decides:

• When to pay dividends: Usually quarterly or annually
• How much to distribute: Based on company performance and cash flow
• Eligibility dates: Which shareholders qualify for payments

Companies announce dividend schedules in advance, specifying both the record date (who qualifies) and payment date (when money is distributed). Not all profits are distributed - companies often retain earnings for growth investments and future opportunities.