Question

Mark Kemp, a student, asks your help in understanding the following characteristics of a corporation: (a) separate legal existence, (b) limited liability of stockholders, and © transferable ownership rights. Explain these characteristics to Mark.

Answer 1

As mentioned in question. Characteristics of a corporation.

1. Separate legal entity: Identity of entity in such case is different from that of its owner. That is to say the owner and the company have two different identity such that the entity is solely and independently responsible for its actions. Income tax act 1961 defines company as a separate legal entity.

Ex: suppose Mr. A registers a company with name A ltd. Here as per law, A and A ltd are two different person in eyes of law.

2. Limited liability of stockholders: Firstly limited liability means onus of expense/ accountability is restricted to the amount invested by stockholders in the business. Stockholder are entity which hold substantial share in business such that there share equals there liability.

Ex: Lets say A invested 10k in firm with position as limited liability and entity owes a amount of say 20k in such case Mr. A is responsible for only his portion i.e. 10k.

3. Transferable ownership rights: it means giving the other person, the buyer of rights in business or entity, the right to own the portion of business that is forgone by the former owner.

Ex: Mr A holds 20% stake in company with 20% of ownership right, he decide to forgo his 10% of ownership and transfer to Mr. B for a considerable amount. Now Mr. A owns 10% and Mr. B 10% of rights.