The 12 Integral Characteristics Defining Corporations as a Type of Business in the Modern Day Economy
Corporations have become one of the most prominent types of business entities in the modern day economy, defined by several key characteristics that set them apart from other organizational structures like sole proprietorships or partnerships. As corporations continue to grow in scale and influence globally, understanding their fundamental attributes provides critical insight into this ubiquitous business model.
Limited Liability Protection for Shareholders
One of the main advantages of the corporate structure is that shareholders generally have limited liability for the debts and obligations of the business. Unlike sole proprietors or partners, who can be held personally responsible for business losses and liabilities, shareholders in a corporation are typically only accountable for the amount they invested. This protections incentivizes investment and shields shareholders’ personal assets.
Separate Legal Entity Status
Corporations are established as their own legal entities, separate and distinct from their owners and managers. This allows them to enter into binding contracts, sue and be sued, hold assets, pay taxes and conduct business generally in a legally-recognized manner. It also shields shareholders and directors from being personally prosecuted for corporate misdeeds.
Ability to Raise Capital through Stock Sales
Selling shares of stock represents a key way corporations can generate capital from a large pool of investors. By dividing equity into transferable shares of stock, corporations can efficiently tap public capital markets and quickly scale business operations in a way not available to other entities.
Centralized Management Under Board of Directors
Corporations are overseen by a board of directors elected by shareholders. The board is responsible for appointing executives to manage day-to-day operations and ensure major decisions align with shareholder interests. This centralized system allows for clear leadership even as ownership changes.
Perpetual Existence
Corporations can continue operating indefinitely beyond the lives of individual leaders, shareholders or employees. As long as corporate formalities are followed, the entity itself can persist despite turnover in ownership and management. This supports long-range planning and multi-generational business growth.
Ease of Transferring Ownership Interests
By turning ownership into publicly tradeable stock shares, corporations allow stakeholders to easily transfer and trade their financial interests. This free transferability provides liquidity options not available with other structures, although transfer restrictions can be implemented.
Financing Through Equity Offerings
Corporations can issue new shares of stock through equity offerings as a means of raising capital. This might include an initial public offering (IPO) for a private company going public, or follow-on offerings by publicly traded firms seeking new investment. It provides a flexible financing option.
Scale and Expansion Capabilities
The corporate structure supports business growth in terms of assets, revenues and locations more readily than other models like partnerships or sole proprietorships. Corporations have the capacity to expand operations domestically and globally via mergers, acquisitions and organic ventures.
Tax Liabilities
One tradeoff of the corporate model is double taxation. Income is taxed at the corporate level, and then may be taxed again when distributed to shareholders as dividends. However, lower corporate rates and other advantages often offset this issue.
Stronger Regulatory Oversight
Corporations face stricter regulations in areas like governance policies, public disclosures, audited financial reporting and compliance practices. While adding complexity, this oversight aims to protect shareholders and hold leadership accountable.
Access to Public Capital Markets
Publicly traded corporations can access the deep, liquid public capital markets through exchanges like the NYSE and NASDAQ. This provides a major advantage in equity financing and stock liquidity over private companies or other entities.
Limited Personal Liability
Because corporations are separate legal entities from their owners, shareholders enjoy limited personal liability meaning they are not responsible for the company’s debts and obligations. This incentivizes investment in corporations and protects shareholders’ personal assets.
In summary, modern corporations are a ubiquitous type of business organization defined fundamentally by attributes like limited liability for shareholders, separate legal entity status, centralized management under a board structure, ability to raise external financing, and perpetual existence. Corporations have access to public capital markets and can scale extensively while also facing stricter regulations. These core characteristics make corporations a flexible, durable type of entity that facilitates large-scale business growth and development.
The Rising Tide of New Corporate Formations
According to data from the International Trade Centre, over 31 million new corporations were registered worldwide in 2021, representing a 18% increase from 2020. This uptick in new business incorporations indicates growing global demand for the corporate model across both developed and emerging economies. While the COVID-19 pandemic stifled new company launches in 2020, many enterpreneurs have bounced back since with new corporate ventures. With increased accessibility of legal and regulatory frameworks globally, corporatization continues to offer a flexible structure for new business ideas.
Expanding Corporate Revenues and Profits
Recent analysis shows that total revenues generated by corporations now accounts for over 75% of global GDP, reaching an record-breaking $84 trillion in 2021. This reflects the sheer scale and economic footprint of corporations, which have seen steadily rising profits over the past decade. According to McKinsey consulting, average corporate profits increased by 12% annually from 2010 to 2020. This outpaced overall GDP growth, demonstrating the ability of corporations to expand revenues faster then broader economic expansion and capture greater market share worldwide. Corporations have proven highly effective at turning human, financial, and technological resources into outsized profits.
The Public Craze for Corporate Stocks
Stock exchanges around the world are experiencing massive growth in new investors speculating on corporate shares. In the U.S. alone, over 10 million new investors entered the stock market in 2020. This influx of individual traders, often using apps like Robinhood, has sent valuations of popular public corporations like Tesla and Apple soaring. While irrational exuberance carries risks, the public craze reflects grassroots faith in corporations ability to generate returns. Loose central bank policies have also flooded markets with liquidity, boosting corporate stocks. As long as Main Street and Wall Street alike see upside in companies going public, demand for corporatization will remain robust.
References:
https://web.archive.org/web/20120617104051/http://fds.oup.com/www.oup.co.uk/pdf/0-19-928983-2.pdf
https://web.archive.org/web/20171015152228/https://www.corpnet.com/types-of-corporations/#gfp
https://www.intracen.org/
https://www.mckinsey.com/
https://www.cnbc.com/
https://www.investopedia.com/terms/c/corporation.asp
https://www.law.cornell.edu/wex/corporations
https://docs.legis.wisconsin.gov/statutes/statutes/180/0301
