A corporation is formed under legislation enacted by a country or a political jurisdiction within it. For instance, in Canada a corporation can be formed under either federal or provincial laws. Although details may vary among jurisdictions, a legal document variously described as articles of incorporation, a memorandum ofassociation, or letters patent is submitted for consideration to the appropriate government by prospective shareholders. The document lists the classes or types of shares that will be issued as well as the total number of shares of each class that can be issued, known as the authorized number of shares.
When approved, the government issues a certificate ofincorporation. Investors then purchase shares from the corporation. They meet and elect a board of directors. The board formulates corporation policy and broadly directs the affairs of the corporation. This includes the appointment of a person in charge of day-to-day operations, often called a president, chief executive officer, or similar title. This person in turn has authority over the employees of the corporation.
A shareholder or group of shareholders who control more than 50% of the voting shares of a corporation are able to elect the board of directors and thus direct the affairs of the company. In a large public corporation with many shareholders, minority shareholders with similar ideas about how the company should be run sometimes delegate their votes to one person who will vote on their behalf by signing a proxy statement. This increases their relative voting power, as many other shareholders may not participate in shareholders’ meetings.
Shareholders usually meet annually to vote for a board of directors—either to re-elect the current directors or to vote in new directors. The board meets regularly, perhaps monthly or quarterly, to review the operations of the corporation and to set policies for future operations. The board may decide to distribute some assets of the corporation as a dividend to shareholders. It may also decide that some percentage of the assets of the corporation legally available for dividends should be made unavailable; in this case, a restriction is created. Accounting for such restrictions is discussed in an appendix of this chapter.
Wherever it is incorporated, a company is generally subject to the following regulations:
- It must provide timely financial information to investors.
- It must file required reports with the government.
- It cannot distribute profits arbitrarily but must treat all shares of the same class alike.
- It is subject to special taxes and fees.
Despite these requirements, a corporation’s advantages usually outweigh its disadvantages when compared to other forms of business such as a proprietorship or partnership. These features of a corporation are described further below. Proprietorships and partnerships are discussed in more detail in a later chapter.
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