What is a Corporation: Evolution, Features and Purpose

The corporation has been defined in many ways as interpreted by individuals; however lawyers and economists call it a nexus of contracts. This means that a corporation is nothing but a sum of all the agreements which lead to its creation. Corporations are also defined as a device for obtaining individual profit without individual responsibility.

To define it more visually, a corporation is a structure established wherein different parties come together and each provides capital, labor or expertise to maximize profits for all of them. A corporation has wide variety of constituents and it needs to relate to all of them; like investors, shareholders, customers, employees, suppliers, creditors, government and finally the community.

Legally, a corporation is identified as a fictional person for some purposes however the corporation itself is separate from its owners and employees. This means, what is owed to the corporation cannot be owed to the people who make the corporation. So is a corporation is sued or gets bankrupt, the individual members of the corporation are not liable to pay the debts.

Let us explore the evolution of corporations into the form we know today. To begin with, in the earlier times, the educational and religious corporations were given considerable independence and perpetual existence to evade the all encompassing power of the king. Later, corporations were set to address state’s specific needs like establishing colonies during the colonial era.

Initially, corporations were characterized by a few wealthy people who negotiated amongst themselves, invested capital and worked towards maximizing profits. However later in the nineteenth century; the rapid technological progress brought the idea of having larger firms employing hundreds and sometimes thousands of people.

The other significant aspect was the need for the capital which was earlier provided by a few wealthy members but now proved inadequate to support the operations of such large firms. The ramification of these changes was the emerging acceptance of the concept of private property which was hitherto unknown as all properties were considered to be belonging to the state or the religious institutions like churches.

There are certain critical features of the corporation which helped its popularity and laid the foundation for the modern day form as we know today.

  • The limited liability which means that the corporation is different from its owners and employees provided the much desired flexibility to the business. This led to buying of stocks of large corporation by people which gave them the relief that if losses happen it would be restricted to the proportion of investment and not be unprecedented. Since, the investment and risks were low, the control of shareholders was also less unlike in the case of partnerships were each partner held a considerable share and could have taken decisions.

  • The second aspect was the transferability of holdings freely, a shareholder loosing on stocks can sell it immediately and recover the investment however in case of partnerships the complexity of evaluating the value of the partnership and the non existence of a stock exchange to trade partnerships made transferability difficult.

  • Legal Personality provided by a corporation is also an interesting aspect, a partnership may end with the death of a partner however a corporation can exist till the time it has capital. Also, certain acts result in legal actions against an individual under ordinary circumstances; but when these are committed by him/her as a part of a corporation, they cannot be held liable for them, legally.

Lastly the society can regulate corporate actions through taxes and fines and direct them to pursue not just economic but social goals as well. Corporations have also gone through the Darwinian principle of natural selection and evolution. So the processes and systems keep changing with the time and context in which the corporations operate.

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Corporate Governance