What Is a Corporation? (Plus Types and a Few FAQs)

By Indeed Editorial Team

Published 31 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A corporation is an organisation or business formed by a group of people. It's a legal entity that's separate and distinct from its owners. Knowing the answer to "What is a corporation?" can help you determine if working for this type of company suits your career goals. In this article, we explain what a corporation is, discuss the different types of corporations and answer some of the frequently asked questions about it.

What is a corporation?

The answer to the question, "What is a corporation?" is that it's a legal entity that its owners control through shares. During the process of incorporation, prospective owners state how many shares they own. Corporations allow groups of people to work together to make a profit.

Individuals known as investors or shareholders can own a piece of that corporation by buying stock, which allows them to earn money and investment returns, depending on how the corporation performs. If a corporation is relatively small, its initial shareholders or investors may be friends and family members of the individual who runs the business. If the company operates on a larger level, there might be hundreds or thousands of shareholders.

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Types of corporations in business

Corporations come in many forms, and each has its own unique responsibilities and structures. The differences between each type reside primarily in how they treat taxes and income. Here are the different types of corporations in business:

Private limited company

Individuals often establish a company as a private company limited by shares or a private limited company**. A private limited company has a share capital that's distributed into a number of shares of a certain value. The investors or shareholders hold these shares and have the legal right to receive a share in the profits of the organisation. They also have the legal right to receive a dividend that corresponds to their respective percentage of shareholding in the organisation. Some of the benefits of a private limited company include:

  • Limited liability: The liability of the investors is limited to the number of their respective shareholdings or investment.

  • Ease of raising capital: The ease of raising finances facilitates business expansion by bringing in new investors or issuing more shares to existing investors. It's easier for a private limited company to secure a bank loan compared to other types of business entities.

  • Separate legal entity: A private limited company also has a legal identity of its own, distinct from its members. This allows the company to enter contracts, acquire assets, go into debt, sue or be sued in its own name.

  • Tax benefits and incentives: A private limited company often enjoys several tax benefits, such as low corporate tax, no capital gains tax, no withholding tax on interest and dividends and no sales tax.

  • Easier transfer of ownership: A private limited company can execute a partial or complete transfer of ownership by selling all or part of its total shares, or by issuing new shares to new investors. It can continue its business operations unaffected and it can easily process all legal documentation.

A private limited company also has some disadvantages, such as:

  • Ongoing compliance: There are several statutory compliance requirements that a private limited company adheres to.

  • Complex to set u**p:** Businessmen often consider a private limited company as more expensive, complex and complicated to establish than a partnership or sole proprietorship.

  • Complex winding-up procedures: Closing a private limited company is more time-consuming, complex and expensive than other business entities.

  • Disclosure requirements: It's necessary for a private limited company to make certain information available, such as personal details of shareholders and capital structure, to the public by filing returns with the Companies Registry.

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Public limited company

A public limited company is limited by shares. Unlike a private limited company, though, it can offer its debentures and shares to the public and it can have over 50 shareholders. Typically, medium to large private companies that have attained considerable growth in the industry often decide to take the corporation public by expanding its investor base.

Many public companies often trade their stocks on a stock exchange. Since they raise capital from the public, public companies are subject to strict regulations. Some benefits of a public company include easy access to capital, ease of implementing acquisitions and mergers and strong public perception. Some of its disadvantages are that it can be time-consuming, it's expensive to operate and establish, it requires you to share profits and takeovers can sometimes be a threat.

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Public company limited by guarantee

A public company limited by guarantee doesn't offer a share capital. It has members, instead of shareholders, who undertake or guarantee to contribute a predetermined amount to the liabilities of the organisation.

Some of the benefits of a public company limited by guarantee include its limited liability and freedom to retain democratic control over all matters. Some of the drawbacks of this type of corporation are that it can't distribute profits and there might be a lack of working capital. This type of corporation is ideal for a nonprofit organisation that's interested in Hong Kong incorporation.

Frequently asked questions about incorporation

Here are the answers to some of the frequently asked questions about corporations:

1. What is the difference between a corporation and a sole proprietorship?

A corporation is owned by shareholders or investors but is a legal entity that's separate from the owners. Investors rarely control the operation of a corporation. Instead, it's controlled by a group of board members. Conversely, a sole proprietorship has one single owner. The owner handles all the operations of the company. A sole proprietorship is one of the easiest ways to structure a company, as it's not necessary to file any documentation, except in certain circumstances.

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2. What are the basic requirements for incorporating a company?

As of 2022, here are the basic requirements for setting up a corporation according to the Companies Registry of Hong Kong:

  • approved company name

  • a register of all persons who have significant control of the company

  • a Designated Representative (DR)

  • a director who is at least 18 years old, not bankrupt and doesn't have a conviction for any malpractices

  • a minimum of one and a maximum of 50 shareholders

  • a company secretary who resides in Hong Kong

  • share capital registered on incorporation

  • registered address

  • a document containing the information about company officers, including shareholders, directors and company secretary

  • corporate tax

  • accounts audited annually by certified public accountants

  • a valid business registration certificate

  • annual general meeting

3. What are the things to consider when a foreigner wants to register for an offshore limited liability company?

Foreigners who wish to register for an offshore company in Hong Kong may consider the following points:

  • A foreigner is free to be the sole shareholder and director of a company. There's no local resident requirement.

  • A foreigner who doesn't plan to relocate to Hong Kong can operate their company in Hong Kong from overseas.

  • While there's no requirement to be physically present at the time of company registration, the Hong Kong government may require the person's physical presence for the purpose of opening a bank account, depending on the bank chosen.

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4. What documents are necessary for company registration?

The documents necessary for company registration include a copy of the articles of association for the company and a duly completed form of incorporation that includes the following:

  • company name and its registered address

  • short description of business activities

  • details of company officials

  • liability of members

  • number of shares taken up by subscribers

  • share capital registered on incorporation

For nonresident directors and shareholders, it's also necessary to submit a copy of their passports. For resident directors and shareholders, it's necessary to submit a copy of Hong Kong identity card and a copy of residential address proof. For corporate directors and shareholders, it's important to submit a copy of parent company registration documents, such as articles of association and certificate of incorporation.

5. Is there any requirement on the number of founder members of a local company limited by shares and the number of shares proposed to be issued?

As of 2022, the Companies Ordinance doesn't have any requirement for the number of shares proposed to be issued. The articles of a corporation with a share capital may specify the maximum number of shares that the corporation may issue. Individuals can form a local company limited by shares with at least one founder member.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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