What is corporation and its types

Q.1 What is corporation and its types?
Definition:
Corporations are 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, called 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 partnership
Typesof corporation:
Companies registered under companies’ ordinance, 1984 can be classified into following
categories by virtue of articles of association:
There are three types of companies provided for under this section: -
(i) Chartered companies
(ii) Statutory companies
(iii) Registered companies
(i) Chartered companies:
The crown in the exercise of the royal privilege has power to create a
corporation by the grant of a charter to the person assenting to be incorporated. No
such companies can be formed in Kenya after independence and section 389 only serve
as a reminder of English origin of our companies Act.
(ii) Statutory companies:
A company may be incorporated by means of a special Act of parliament. A
statutory company has no shareholders and its initial capital is provided by the
treasury. It is expected to operate according to commercial principles and to make
profit. If it makes losses and becomes unable to pay its debts, its property can be
attached by its creditors but it cannot be wound up on application of any
creditor. However, the government will come to its aid if it has no cash or other assets
to pay its creditors. Examples include- Kengen, KP&L.Co, Kenya Pipeline, Kenya
Railways, KTDA, KVDA etc.
(iii) Registered companies:
A registered company is formed by registration under the Companies Act. Section 2 of
the Companies Act defines a company as “a company formed and registered under this
Act.”

Classification of registered companies section 4(I) classifies registered companies into:-
(a) Public company – A company formed by any seven or more persons.
(b) Private company – A company formed by any two or more persons.
A private company or a public company may be:-
1) Limited by shares – if the liability or its members is limited by its
memorandum to the amount if any unpaid on the shares held by them.
2) Limited by guarantee -- if the liability of its members is limited by its
memorandum to an amount which the members have undertaken to contribute
to the assets of the company in the event of its being wound up.
3) Unlimited -- if it does not have any limit on the liability of its members.
PRIVATE AND PUBLIC COMPANIES
Private Limited Company
As per the provisions of companies’ ordinance, 1984 private limited companies
are defined as:
A private limited company is the company which restricts the right to the transfer the
shares if any
Private Limited Company restricts the maximum number of members to be fifty.
Private Limited Company prohibits any kind of invitation to general public to subscribe
for its any shares and pay any amount to the company in that respect.
Public Company:
A company other than a company registered as private limited company is
called public limited company. Companies’ ordinance defined certain conditions for
public limited companies which are as under:
A company registered as public limited company does not impose any restrictions on
the number of members that the company can have.
A Public company is a company which does not impose any restriction on the right of
transfer of its shares.
Public company does not impose any restriction on the invitation to general public to
subscribe for its shares and pay any amount in respect of that subscription.
Q.2 Advantageand Disadvantageof corporation form of
organization?
Some of the merits of company form of organization are discussed below:
1. Accumulation of Large Resources:
The main drawback of the sole trade and partnership concerns has been the scarcity of
resources. The resources of a sole trader and of partners being limited, these enterprises
have always suffered for want of funds. A company can collect large sum of money
from large number of shareholders. There is no limit on the number of shareholders in a

public company. If need for more funds arises, the number of shareholders can be
increased. Joint stock companies are suitable for those businesses where large resources
are required.
2. Limited Liability:
The liability of members in a company form of organization is limited to the nominal
value of the shares they have acquired. If a person has purchased a share of Rs. 100, his
liability is limited to Rs. 100 only. If the share is partly paid, then he can be required to
pay only the unpaid value of the share. In no case the total payment will exceed Rs. 100.
The limited liability encourages many persons to invest in shares of joint stock
companies. Many persons will be reluctant to invest in those enterprises where liability
is unlimited.
3. Continuity of Existence:
When a company is incorporated, it becomes a separate legal entity. It is an entity with
perpetual succession. The members of a company may go on changing from time to
time but that does not affect the continuity of a company. The death or insolvency of
members does not in any way affect the corporate existence of the company. The
continuity of a company is not only in the interests of the members but is also beneficial
for the society. The discontinuation of a company may cause wastage of resources and
inconvenience to the consumers.
4. Efficient Management:
In company form of organization, ownership is separate from management. It enables
the company to appoint expert and qualified persons for managing various business
functions. The availability of large-scale resources enables the company to attract
talented persons by offering them higher salaries and better career opportunities. The
efficient management will help the company to expand and diversify its activities.
5. Economies of Large Scale Production:
With the availability of large resources, the company can organize production on a big
scale. The increase in scale and size of the business will result in economies in
production, purchase, marketing and management, etc. These economies will enable the
company to produce goods at a lower cost, thus resulting in more profits. The company
will help consumers by providing them with cheaper goods and will also be able to
accumulate more resources for further expansion.
6. Transferability of Shares:
The shares of a public company are freely transferable. A shareholder can dispose of his
shares at any time when the market conditions are favorable or he is in need of money.
The company does not return share-money before its winding up but shareholders can
easily sell their shares through stock exchange markets.
Stock Exchange provides a ready market for the purchase and sale of shares. The facility
of transferring shares encourages many persons to invest. This provides liquidity to the
investor and stability to the company. On the other hand, partnership form of
organization does not provide free transferability of shares.

7. Diffused Risk:
In sole trade and in partnership business, the risk is shared by a small number of
persons. Further uncertainties discourage them from taking up new ventures for fear of
risk. In company form of organization, the number of contributories is large; so risk is
shared by a large number of persons. The burden to be shared by different individuals
becomes insignificant. It enables companies to take up new ventures.
8. Democratic Set-up:
The values of shares are generally small. It enables persons with low incomes to
purchase the shares of companies. Shareholders come from all walks of life. Every
individual has an opportunity to become a shareholder. Secondly, the Board of
Directors is elected by the members. So members have a say in deciding the policies of
the company. The company form of organization is democratic both from ownership
and management side.
9. Social Benefits:
The company form of organization mobilizes scattered savings of the community.
These savings can be better used for productive purposes. The companies also enable
financial institutions to invest their money by providing them avenues. It also enables
the utilization of natural resources for better productive uses. Large-scale production
enjoys a number of economies enabling low cost of production. The society is supplied
with enough quantity of goods.
Disadvantages of Company Form of Organization:
The company form of organization suffers from the following drawbacks:
1) Difficulty of structure:
Promotion of a company is not an easy task. A number of stages are involved in
company promotion. The suitability of a particular type of business is to be decided
first. A number of persons should be ready to associate for getting a company
incorporated. A lot of legal formalities are required to be performed at the time of
registration. The shares will have to be sold during the particular time. Promotion of a
company is both expensive and risky.
2) Separation of Ownership and Management:
The ownership and management of public company is in different hands. The owners
i.e., shareholders play an insignificant role in the working of the company. On the other
hand, control is in the hands of those who have no stakes in the company. The
management may indulge in speculative business activities. There is no direct
relationship between efforts and rewards. The profits of the company belong to
shareholders and the Board of Directors are paid only a commission. The management
does not take personal interest in the working of the company as is the case in
partnership and sole-trade business.
3) Problems of Factory System:
The company form of organization leads to large-scale production. The evils of factory
system like insanitation, air pollution, congestion of cities are attributed to joint stock

companies. Joint stock companies facilitate formation of business combinations which
ultimately leads to the monopolistic control and exploitation of consumers.
4) Assumption in Shares:
The joint stock companies facilitate speculation in the shares at stock exchanges. The
prices of shares depend upon both economic and non-economic factors. The speculators
try to fluctuate the prices of shares according to their suitability. The stock exchanges
will not help the growth of healthy investment when speculative activities are being
carried on. The management of joint stock companies also sometimes encourage
speculation in shares for their personal gains.
5) Deceptive Management:
The promoters and directors may indulge in fraudulent practices. The management is
in the hands of those persons who have not invested much in the company. The
Company Law has devised methods to check fraudulent practices but they have not
proved enough to check them completely.
6) Lack of Secrecy:
The management of companies remains in the hands of many persons. Everything is
discussed in the meetings of Board of Directors. The trade secrets cannot be maintained.
In case of sole trade and partnership concerns such secrecy is possible because a few
persons are involved in management.
7) Delay in Decision-making:
In company form of organization no single individual can make a policy decision. All
important decisions are taken either by the Board of Directors or are referred to general
house. Decision-taking process is time consuming. If some business opportunity arises
and a quick decision is needed, it will not be possible to arrange meetings all of a
sudden. So many opportunities may be lost because of a delay in decision-making.
Q.3 Right of shareholder?
A shareholder or stockholder is an individual or institution (including a corporation)
that legally owns a share of stock in a public or corporation. Shareholders are the
owners of a limited company. They buy shares which represent part ownership of a
company.
Stockholders are granted special privileges depending on the class of stock. These rights
may include:
o The right to sell their shares.
o The right to vote on the directors nominated by the board.
o The right to nominate directors (although this is very difficult in practice because
of minority protections) and propose shareholder resolutions.
o The right to dividends if they are declared.
o The right to purchase new shares issued by the company.
o The right to what assets remain after a liquidation.

Q.4 What is capitalstock?
DEFINITION:
The common and preferred stock a company is authorized to issue,
according to their corporate charter. Capital stock represents the size of the equity
position of a firm and can be found on the balance sheet (or notes) of a typical financial
statement. Firms can both issue more capital stock, or buyback shares that are currently
owned by shareholders.
Q.5 Define par value, marketvalue & book value?
 Definition of 'par value';
The face value of a bond. Par value for a share refers to the stock value stated in the
corporate charter. Par value is important for a bond or fixed-income instrument because
it determines its maturity value as well as the dollar value of coupon payments. Par
value for a bond is typically $1,000 or $100. Shares usually have no par value or very
low par value, such as 1 cent per share. The market price of a bond may be above or
below par, depending on factors such as the level of interest rates and the bond’s credit
status. In the case of equity, par value has very little relation to the shares' market price.
Also known as nominal value or face value.
 Definition of 'Market Value'
Market value refers to the current or most recently-quoted price for a market-traded
security. It can also refer to the most probable price an asset, like a house, would fetch
on the open market.
 Definition of ‘Book Value'
Book value refers to the total amount a company would be worth if it liquidated its
assets and paid back all its liabilities. Book value can also represent the value of a
particular asset on the company’s balance after taking accumulated depreciation into
account.
Q.6 Preferred stock & common stock?
This means that when the company must liquidate and pay all creditors and
bondholders, common stockholders will not receive any money until after
the preferred shareholders are paid out. Second, the dividends of preferred stocks are
different from and generally greater than those of common stock.

What is corporation and its types

More Related Content

What's hot

Viewers also liked

Similar to What is corporation and its types

Recently uploaded

In this document

What is corporation and its types