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Why Were Corporations Formed, Its Fundamentals, and Roles in Today's World

Why Were Corporations Formed, Its Fundamentals, and Roles in Today’s World

Stephanie Martinez
Stephanie Martinez
March 30, 2023

The first fact that comes to mind when we hear “corporation” is a large, profit-driven business structured as a legal entity. But why were corporations formed, and what makes them different from other types of companies? Also, what are their roles in today’s world?

Before we dig deeper into “Why were corporations formed?,” let’s have a brief overview of their fundamentals.

What Is a Corporation?

It is a legal business entity formed by a group of individuals or companies. Private corporations have been one of the most prominent types of businesses worldwide for centuries. They are essential to our modern economic system and protect individual investments and ensure the same rights for two or more entities.

Business corporations play a critical role in producing and distributing goods and services. We can feel their impact in every aspect of our lives. Corporation examples – Apple Inc., Google, Amazon, etc.

However, the concept of a corporation has evolved over centuries. It’s essential to know a short history to understand their modern roles. This may help you answer related tricky questions on and be prepared for your tests.

How are Corporations Formed: A Brief Corporation History

They were formed in medieval Europe in the 16th and 17th centuries to allow common people to invest in large-scale business ventures. They are developed forms of guilds formed by merchants to protect their interests and regulate trade.

As per historical records, King Magnus Eriksson of Sweden established the first corporation in 1347, so traders could conduct business through common law constructs.

Contribution of the East India Company:

The East India Company, a trading company during the reign of Queen Elizabeth I (1558 to 1603) of the British Royal Family, formed one of the first corporations for business expansion worldwide. 

As a business corporation, this company established trading posts and factories in India and other parts of Asia. Their activities included producing and selling textiles, tea, spices, indigo, etc. The monarchy granted them the royal charter, giving them a monopoly on trade with specific regions of the world.

In the seventeenth and eighteenth centuries, the East India Company played a critical role in the Industrial Revolution. As new technologies emerged, entrepreneurs started forming a corporation to finance the construction of factories and the purchase of machinery.

These corporations encouraged shareholders to pool their resources. They ensured to protect individual investments of shareholders and the rewards of business ventures.

By the 19th century, they had become the dominant form of business organization. They triggered capitalism’s growth and led to modern financial markets’ expansion. This includes forming the first stock exchanges in London and Paris in the early nineteenth century.

Why Were Corporations Formed?

Why Were Corporations Formed?

Four primary factors triggered the “Formation of Corporation”. Do note the following points for your corporate strategy assignment help and overall understanding.

Protect Constructed Railroads:

In the 19th and early 20th centuries, corporate organizations protected constructed railroads by various means to ensure seamless business.

  • Legal Measures: They used corporation laws to protect constructed railroads and keep them off competition. So, their competitors couldn’t build tracks in the same area.
  • Physical Protection: They hired private security forces to protect constructed railroads and trains from damage or sabotage.
  • Monopolistic Practices: By eliminating competition, they encouraged monopolistic practices. Other companies could use their railroads only by paying the required price.

These strategies helped them protect their railroads and dominate the transportation industry.

Generate More Income for Tribals:

Corporate entities helped indigenous tribes earn more through partnerships with various industries. These partnerships allowed tribes to generate revenues from their natural resources and create a diversified economy to boost job opportunities and economic development.

Also, they helped tribals earn more through developing tourism. Building hotels, resorts, recreational facilities, and attractive promotional campaigns attracted tourists. So, the tribals could earn by selling goods created by natural products and providing services. Also, they enforced tourism-related taxes and imposed a strong Leadership Statement.

Protect Individual Investments:

Broadly speaking, a corporate entity, under a strong financial sector, can protect individual investments in several ways. This includes:

  • Diversification: Corporations invest in many types of assets, like stocks, bonds, commodities, real estate, etc., to reduce the risk of individual shareholders.
  • Due Diligence: A corporate entity conducts thorough research and analysis before investing in assets.
  • Utilization of financial instruments: A corporation uses financial instruments like portfolio monitoring and options-and-futures to mitigate risk and protect individual investments.

Big corporate houses engage experienced investment professionals to effectively manage risk and protect individual investments and personal assets, with transparency and compliance.

Government Money Answer:

Corporation entities are often seen as the “Government Money Answer” as they help the government earn money in various ways.

  • Corporate taxes: Large corporate houses pay significant taxes on their profits, which is a huge source of government revenue.
  • Job Creation: A corporation offers substantial job opportunities for people from every society and background. Taxes from their incomes and expenditures help make the government money.
  • Economic Growth: Corporation houses boost overall financial growth. They make the government money by creating job opportunities and accelerating economic and cultural development.

So, they can raise contracts to increase government money. A corporation can issue stocks and bonds to raise money from every shareholder, an excellent national income source.

What Is the Advantage of Forming a Corporation?

What Is the Advantage of Forming a Corporation?

Corporations, also known as businesses or companies, play a crucial role today. They provide goods and services to generate profits for their owners or shareholders. While this profit-making motive may seem to be their only motive, they have other activities that impact society and the environment.

Limited liability:

One of the main reasons for their formation was to provide limited liability protection to their owners. It means that the shareholders are not personally accountable for the liabilities and debts of the corporation beyond their individual investment therein. It thus allows individuals to invest in businesses without risking their personal assets.

Access to more capital:

Corporations access large amounts of funds from investors. By pooling the resources of many shareholders, they can raise significant amounts of capital to finance their operations and growth.

Perpetual existence of joint stock companies:

Another benefit is their perpetual existence under corporate law. They can continue to exist even if their owners or shareholders change, based on a state’s regulation. 

Separation of ownership and management:

It enables the owners, directors, and shareholders of the company to focus on investing in their company, leaving the day-to-day operations to the management.

Transferability of ownership:

The directors of a single-entity corporation can easily transfer their ownership through the buying and selling of stock shares, making it easier for investors to invest or exit their outlay in the company under state law.

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Key Takeaways:

So, the corporation was formed to protect individual investments, access to more capital, perpetual existence, separation of management from ownership, and transferability of directors and management compliant to a state’s business laws.

Also, corporations ensure equal rights for all its entities. They contribute to the economy, create employment opportunities, promote innovation and research, protect the environment, and fulfill social responsibilities.

Frequently Asked Questions

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Why were corporations formed?

The primary responsibility of a corporation was to protect individual investments of its investors along with other activities like protecting railroads, securing tribals’ livelihoods, earning money for govt., etc.

How is a corporation organized?

It is organized by companies and shareholders who invest in the entity to make profits from their investments.

How to form a corporation?

To form a corporation, applicants, companies, and individuals must fill up the articles of incorporation with the secretary of state’s office and legally document its formation.

What is a corporation made up of?

It is a legal entity comprising companies, stockholders, and shareholders. It makes revenue.

What are the main features of a corporation?

Its main features include pooling funds, limited liability, legal undertaking, governance and compliance, and other relevant activities for increasing its companies’ revenues.

What is the nature of a corporation?

It is a body formed under legal supervision to ensure its liabilities and functioning without political influence.

What is an example of a corporation?

Google, Apple Inc., Microsoft, and Amazon are examples of big corporations.

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Stephanie Martinez

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