“A corporation is an artificial being, invisible, intangible and existing only in contemplation of law. It has neither a mind nor a body of its own.” – Explain & Illustrate.
1. INTRODUCTION:
The most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships. This project is basically an analysis of issues mentioned above in terms of legal framework.
2. WHAT IS A CORPORATION?
2.1 DEFINITION:
A corporation comes into existence by an act of the state. In 1819 the Supreme Court defined a corporation as “an artificial being, invisible, intangible and existing only in the contemplation of law”. Thus a corporation is a legal entity which means that it has a legal existence separate and apart from the existence of its owners[1].
A corporation consists of the shareholders, who own the business and the board of directors, whose members the shareholders elect to manage the business. The board elects officers, such as a president and several vice presidents, who run the daily operation of the business.
Since a corporation is legal entity, it possesses nearly the same rights as a person. It can enter into contracts, buy or sell property, sue or be sued in its own name and perform other acts that are necessary to carry on a business.
2.2 TYPES OF ORGANIZATON:
A company may be chartered[2], i.e. set up by a charter from the Crown, and may then derive its powers from the charter. The very first companies were of this variety, e.g. the East India Company, the Massachusetts Bay Company, and the Hudson’s Bay Company. Today chartered companies are not economic significance but they still exist. Generally they are not trading concerns. A further type of company is the statutory company[3].
Third type of company in this classification is the most common of all. This is the registered company[4]. Registered company’s originated with the Joint Stock Companies Act of 1844 when Gladstone was President of the Board of Trade[5].
A fundamental distinction which pervades the whole of company law is the distinction between public and private companies. The great mass of companies is public companies. The basic distinction is that a public company may offer its shares and debentures to the public whilst it is a criminal offence for a private company to do so[6]. A further distinction is the capital requirement first introduced in Companies Act 1980 which requires that a public company must have a minimum subscribed share capital of £50,000 (§ 11 Companies Act 1985). This must be paid up to at least 25% so at least £12,500 must already have been raised by issue of shares. A public company must furthermore have a trading in addition to its certificate of incorporation (s 117 of Companies’ act 1985). This trading certificate will only be issued once the Registrar of Companies is satisfied that the company has satisfied the formalities of the Act and raised the required minimum capital. The name of the company will indicate whether the company is public or private[7]. Corporations are commonly classified according to several attributes. Public corporations are generally governmental or quasi-governmental units designed to administer public affairs[8].
3. FORMATION OF A COMPANY:
3.1 PROMOTERS:
Promoters are people who bring a corporation into a being. Thus, promotion is a vital activity in a free enterprise system. The promoter is a person who has the idea for a business. He finds people who are willing to finance it to buy shares of stock and or to lend money and credit. Contracts must be made for building or leasing space, buying or renting equipment, hiring employees, buying supplies and advertising, and whatever else is required for the early operation of the business[9]. Most state incorporation statutes permit reserving a name for a proposed corporation. This is also done by the promoter. He must arrange for the filing of the legal papers to incorporate the business and she will usually guide the corporation through the early months or years before the new company is a going concern. While promoter may start with an idea and build a corporate business around it, this is not always the case[10].
3.2 ISSUING SHARES TO THE PUBLIC:
There are different rules applicable to the issue of shares to the public dependent upon whether the issue is to be made via the official list of the stock exchange or on the unlisted securities market or in some other way[11].
The statutory remedy for misleading listing particulars permits recovery for misleading particulars for subscribers and those purchasing on the open market (subject to various defenses). The statutory remedy for a misleading prospectus limits recovery to subscribers from the company. However when part v is brought into force the remedy will mirror that in part iv of the Financial Services act 1986. Various other remedies may be available in both cases rescission or damages in misrepresentation, damages in the tort of deceit and damage in the tort of negligent misrepresentation may be available. There are also various criminal sanctions that apply where a misleading prospectus or misleading particulars are issued.
3.3 MEMORANDUM OF ASSOCIATION:
The memorandum (as it is generally known) is sometimes termed the external constitution of the company. This document sets out certain key features of the company’s status. The memorandum is generally coupled together in the same document with the articles of association (the internal constitution of the company). Therefore, practice, although they are submitted together to the registrar of companies.
The memorandum of association has certain compulsory clauses. These are set out in s 2 of the Companies Act 1985. It is important for both practitioners and students (whether budding lawyers or accountants) to know what these compulsory clauses are. They are as follows[12]:
v the name of the company;
v in the case of public company, a sub-clause stating that the company is a public limited company;
v the situate of the office of the company;
v a statement of the objects of the company;
v a statement of the limitation of liability of the company (by shares or by guarantee);
v a capital clause starting the amount of the share capital which is authorized and the division of the share capital into shares of a stated amount.
3.4 ARTICLES OF ASSOCIATION:
In addition to the memorandum of association, before a company can be registered the company’s promoters must also submit to the registrar the company’s articles of association[13]. There exist certain model articles of association. These are set out in Companies (Tables A – F) Regulations 1985 (SI 1985 No 805). Section 128 of the Companies Act 1989 makes provision for a Table G in relation to articles of association for a partnership company. Companies may elect to adopt the relevant table of articles and thus obviate the need for framing their own sets of articles. The most common form of articles is Table A. These articles are applicable to private and public companies limited by shares. In so far as a company fails to register articles or to make provision for any matter Table A articles or to make provision for any matter Table A articles for the time being in force will apply (s 8(2) of the Companies Act 1985).
4. MANAGEMENT AND OPERATION:
4.1 DIRECTORS:
The ultimate responsibility for seeing that the corporation acts within its powers rests on the board of directors[14]. Logic would seem to dictate that responsibility should be the shareholders’ because they own the corporation. However, the principal responsibility of those holding stock with voting rights is to elect the directors. Shareholders play a vital role in the corporation, but not in its day-to-day management.
4.1.1 ELECTION AND REMOVAL OF DIRECTORS:
The MBCA permits a corporation to have just one director [RMBCA §8.02 (a)], but a number of states require a minimum of three. The articles of incorporation must name the corporation’s initial board members and set their terms. The articles also specify when the shareholders will meet to replace the initial directors. Thereafter, elections take place at the shareholders’ annual meeting.
The shareholders may remove directors with or without cause at a special meeting called specifically for that purpose [RMBCA §3.08].However, the articles may provide that a director may only be removed for cause. Also, the shareholders may consider other business at the special meeting called to remove of a director on the agenda. Under the straight voting method, removal normally requires just a majority vote[15].
4.2 SOURCES OF FINANCING:
A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. Finance sources can be divided into three categories, namely traditional sources, ownership capital and non-ownership capital[16].
4.2.1 TRADITIONAL SOURCES OF FINANCE
Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company’s assets, factoring or invoice discounting, personal savings and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company’s day-to-day activities, including salaries, rent, payments for raw materials and electricity bills[17].
4.2.2 SOURCES OF FINANCE: OWNERSHIP CAPITAL
Ownership capital is the capital owned by the shareholders of a company. A company can raise substantial funds through an IPO (initial public offering). These funds are usually used for large expenses, such as new product development, expansion into a new market and setting up a new plant. There are various types of shares like ordinary shares, preference shares[18].
4.2.3 SOURCES OF FINANCE: NON-OWNERSHIP CAPITAL
Non-ownership capital includes funds raised from lenders, such as banks and creditors. Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by companies to meet their short-term fund requirements, as they usually come at a very high interest rate.
4.3 ROLES OF SHAREHOLDERS:
Major decisions which would have an effect on the shareholders’ rights are usually required, through the Companies Act 2006, to be approved by the shareholders at a general meeting called by the directors of the company.
Only certain acts can be done by the shareholders such as; removing a director from office, changing the name of the company, or authorising a service contract for a director which gives him job security for more than two years. In general, shareholders have little power over the directors and how they run the company, but their main role is to attend meeting and discuss what ever is on the agenda to ensure the directors do not go beyond their powers[19].
5. WINDING UP:
Liquidation is a legal process in which a liquidator is appointed to ‘wind up’ the affairs of a limited company. At the end of the process, the company ceases to exist. Liquidation does not mean that the creditors of the company will get paid. The purpose of liquidation is to ensure that all the company’s affairs have been dealt with properly. This involves:
• ensuring all company contracts (including employee contracts) are completed, transferred or otherwise brought to an end;
• ceasing the company’s business;
• settling any legal disputes;
• selling any assets;
• collecting in money owed to the company; and
• distributing any funds to creditors and returning share capital to the shareholders (any surplus after repayment of all debts and share capital can be distributed to shareholders).
6. CONCLUSION:
In a general sense, a corporation is a business entity that is given many of the same legal rights as an actual person. Corporations may be made up of a single person or a group of people, known as sole corporations or aggregate corporations, respectively[20].
Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade.
A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.
Bibliography:
1. Bohlman, H. M., Dundas, M. J. and Jentz, G. A., The legal Environment of Business(1989), West Publishing.
2. Bourne, N., Company Law (1994), Cavendish Publishing Lmited, London.
3. Clark, S. L. and Kinder, P.D., Law and Business, 3rd ed. McGraw Hill Inc.
4. Barnes, A. J., Dworkin, T. M. and Richards, E. L., Law for Business(1994), 3rd ed., McGraw Hill Inc.
5. Meiners, R. E., Ringleb, A. H. and Edwards, F. L., The Legal Environmet of Business(1994), 5th ed., West Publishing.
6. Shaw, B. and Wolfe, A., The Structure of the Legal Environment , Law, Ethics and Business(1986), 5th ed., PWS – Kent Publishing Comp.
7. Conless, R. N., Reed, O. L. and Shedd, P.J., The legal Environment of Business(1990), 8th ed. McGraw Hill Inc.
8. Kolasa, B. J., The legal Environment of Business(1990), Addison – Wesley, p 106.
9. Conry, E. J., Ferrera, G. R. and Fox, K. H., The legal Environment of Business(1986), W.M.C. Brown Publishers.
10. Scaletta, Cameron, (1990). Foundation of business law, 2nd ed. BPI IRWIN.
11. Beatty, Samualson, (1996). Business law for a new century. Little brown and company.\
12. Klaymen, Bagby, Eelis, (1994). Irwin’s business law. IRWINS.
13. Jentz, Miller, Cross, Carkson, (1992). West’s business law, 4th ed. West publishing company.
14. Tucker, E. D. and Henkel, J. W., The Legal and Ethical Environment of Business(1992), Irwin, Boston, USA, p – 354.
[1] See on The Legal and Ethical Environment of Business p – 354
[2] See on Company Law, Prof. Nicholas Bourne, p 03
[3] In Victorian England there was a great plethora of incorporations. Each company had to be set up by separate act of parliament. During this period of industrial revolution, the great mass of companies involved public utilities such as gas, water and transportation such as canal companies and railway companies.
[4] According to Company Act 1985, company will be registered i.e. its name will be added to the list of registered companies and a file will be opened in its name at companies and a file will be opened in its name at Companies House in Cardiff.
[5] See on Company Law, Prof. Nicholas Bourne, p (03 – 04)
[6] See Financial Services Act 1986, § 143(3), 170 and 171(3)
[7] The description ‘public limited company’ or as abbreviated ‘plc’ (or Welsh equivalent ‘ccc’ and ‘cwmni cyhoeddus cyfyngedig’) will indicate that the company is public one. By contrast if the company is expressed to be ‘limited’ or as abbreviated ‘ltd’ or ‘cyfyngedig’ or as abbreviated ‘cyf’, the company is a private company. If a company is registered as a public company this fact must be stated in its memorandum (s 25(1) of the Companies act 1985).
[8] For example, many municipalities (cities, towns, boroughs, and townships) are organized as municipal corporations under state status establishing their purpose and granting them certain powers. Private corporations are organized for business purposes. They are owned by individuals and generally have a profit motive, although some are not-for-profit organizations with charitable or community benefit purpose – for example, major charities, universities, some hospitals etc.
[9] See on Irwin’s Business Law p. 823
[10] In many instances, the promoter will take a sole proprietorship or partnership and convert it into the corporate form. And, of course, rather than always having a single promoter, frequently the corporation will be created through the vision and efforts of a group of promoters.
[11] See on Company Law, Prof. Nicholas Bourne, p (31-34)
[12] See on Company Act 1985 s 151(2)
[13] These articles of association, as has been noted, are sometimes known as the internal constitution of the company. They cover such matters as the holding of meetings, the appointment of directors, declaration of dividends, and the appointment of the company secretary.
[14] As the RMBCA [§8.01 (b)] puts it, “all corporate powers shall be exercised by or under the authority of the board of directors.” “Exercised by” means that the board is actually involved in the making of corporate decisions and policy. “Under the authority of” refers to the fact that the board may delegate authority to its committees – particularly, as we will see, to its executive committee-and to corporate employees.
[15] If the corporation’s articles require cumulative voting, removal is a more involved procedure. Unless all the board members are being removed, the shareholders may not remove a director if the votes cast against that directors’ removal would be sufficient to elect him if they were cumulatively voted at an election of the entire board of directors.
[16] See on The Legal Environment of Business p 473
[17] See on The Legal Environment of Business p 473
[18] Ordinary shares: These are also known as equity shares and give the owner the right to share the company’s profits and vote at the firm’s general meetings. Preference shares: The owners of these shares may be entitled to a fixed dividend, but usually do not have the right to vote.
[19] To fulfil the role of being a shareholder, a shareholder may require a general meeting to be called rather than simply have all decisions made through written resolutions. The directors will in fact call a general meeting, despite not being able to vote at the meeting, as this duty is solely for the shareholders
[20] See on West’s Business Law 4th ed. P 524