Public Corporation Law and Governance Explained

Key Takeaways

• A public corporation is a state-created entity or government-owned corporation that serves public purposes, distinct from privately owned businesses.
• Public corporations balance government oversight with operational independence, often through appointed boards of directors.
• They differ from private corporations in shareholder access, capital raising ability, and disclosure obligations.
• Public corporations must comply with federal securities laws, SEC reporting, and corporate governance standards, which emphasize accountability and transparency.
• Distinctions exist between governmental public corporations and publicly traded corporations, both of which fall under public corporation law but serve different roles.

Public corporation law is created with the sole intention of governing the actions and activities of public corporations created by a state to execute public missions and services.

Public Corporation

In order to carry out these services and missions, public corporations provide services or participate in activities similar to that of private enterprises.

To ensure success, public corporations are granted operational flexibility while retaining the principles of fundamental public policy and public accountability. A public corporation's board of directors is appointed by the sitting Governor while the Senate confirms said appointment. However, the board of directors has the authority to manage the public corporation's operations and set policy as they see fit.

Any district, county, or city that is organized for public purposes can be designated as a public corporation.

Governance and Oversight of Public Corporations

Public corporations operate under enabling statutes that define their mission, powers, and limits. While they often receive funding or authorization from state or local governments, they retain financial independence through revenue generation, bond issuance, or service fees. Boards of directors or trustees, typically appointed by government officials, are responsible for setting long-term strategies, approving budgets, and ensuring adherence to public policy objectives.

Oversight mechanisms include:

• Government Appointments: Governors or mayors appoint board members, subject to legislative confirmation.
• Audits and Reporting: Regular financial and performance audits are mandated to ensure accountability.
• Public Accountability: Open meeting laws and disclosure requirements maintain transparency with the public.

This structure seeks to balance independence with accountability, preventing excessive political influence while ensuring alignment with public interests.

Corporations

Under the law, corporations are entities (usually businesses) that have the authority to act as a person separate from its owners (shareholders). There are various kinds of corporations in existence and are classified based on the following factors

• Business purpose
• Manner of taxation
• Amount of stock issued and number of shareholders
• Incorporated as a for-profit or non-profit

Legal Framework for Public Corporations

Public corporations are subject to both state law and, if publicly traded, federal securities laws. Key elements of the legal framework include:

• State Incorporation Statutes: Define powers, duties, and governance structures.
• Federal Securities Regulations: For corporations issuing shares to the public, compliance with the Securities Act of 1933 and Securities Exchange Act of 1934 is mandatory.
• SEC Reporting Requirements: Public corporations must file annual (Form 10-K), quarterly (Form 10-Q), and current (Form 8-K) reports, ensuring shareholders receive timely information.
• Corporate Governance Rules: Exchanges like the NYSE and NASDAQ impose listing standards covering board composition, audit committees, and shareholder rights.

These requirements aim to foster transparency, prevent fraud, and protect investor confidence.

Types of Corporations

The following are the various types of corporations

Business Corporation

These are corporations formed to make a profit by engaging in commercial purposes. It is also known as a for-profit corporation.

C Corporation

These are corporations whose income are taxed through the corporation itself rather than its shareholders. Under the IRS Code, any corporation not specifically designated as an S Corporation is a C Corporation.

Close Corporation

Although the privileges and requirements of close corporations vary, they are corporations whose stocks are freely traded but held by few shareholders, often from the same family.

Controlled Corporation

These are corporations where a single firm or individual holds the majority of stock

Cooperative Corporation

These kinds of corporations are formed to provide profits and services to its members. Some examples include corporations formed to invest in real estate properties (such as apartment buildings) so that members can benefit from the lease on the apartments.

Foreign Corporation

Although they are registered in one state, foreign corporations are authorized to carry out business transactions in multiple states. Sometimes referred to as overseas corporations transacting business within the U.S., these kinds of corporations are usually created to benefit from state incorporation laws and tax breaks.

Non-Profit Corporation

These are corporations organized for special purposes not related to profit making. They are usually eligible for tax-exempt status.

Private Corporation

These are created and constituted by private individuals for nonpublic purposes such as railroad, banking, and manufacturing corporations. They also include religious and charitable corporations.

Professional Corporation

These corporations are created for and made up of professional types such as veterinarians, physicians, lawyers, accountants, architects, etc. They provide services whose execution requires some form of professional license.

Public Corporation

A public corporation is one whose shares are traded to the general public. They are typically government-owned (although they remain financial independent) and provide services that benefit the general public.

S Corporation

These kinds of corporations are taxed through the income/dividend paid out to its shareholders. Under the IRS Code, only corporations with a limited number of shareholders are eligible for S-corporation tax status.

Government-Owned vs. Publicly Traded Corporations

The term public corporation can mean two distinct entities:

1. Government-Owned Public Corporations
   • Created by legislatures to deliver essential services (e.g., utilities, transportation authorities, housing agencies).
   • Funded through service revenues, bonds, or government subsidies.
   • Focused on public welfare rather than profit maximization.
2. Publicly Traded Corporations
   • Private enterprises whose stock is offered to the public on exchanges.
   • Must comply with strict securities laws, financial reporting obligations, and corporate governance standards.
   • Raise capital more easily by issuing stock or bonds.

Both are “public” in different senses—one because it is government-owned, the other because it offers ownership to the general public.

Private vs. Public Corporation

The major difference between a public and private company is that the shares of private companies are not made available to the public. A vast majority of companies are private and range from one person operations to multinationals with hundreds of shareholders.

Closed corporations are close alternatives to the private company structure. Although the shares are also not available to the public, there are restrictions in place that limits the maximum number of shareholders they can have. Close corporations resemble partnerships since the majority or all of the shareholders participate in setting corporate policy as well managing the affairs of the corporation.

To qualify as a close corporation, all the statutory requirements of the particular jurisdiction must be met and the entity must choose to refer to itself as a close corporation. Close corporations have fewer formalities and often have a small asset base.

Public companies are held accountable by their shareholders and subject to further restrictions than privately held companies. Their shares are open to the public — resulting in a higher minimum number of shareholders and directors as well as higher minimum authorized share capital.

Compliance and Disclosure Obligations

Public corporations face significantly higher compliance burdens than private corporations. Examples include:

• Disclosure of Financial Information: Publicly traded corporations must disclose detailed financial data, risk factors, and management discussion in SEC filings.
• Shareholder Rights: Greater accountability to a dispersed shareholder base requires annual meetings, proxy voting, and adherence to fiduciary duties.
• Corporate Governance Policies: Public corporations must implement codes of conduct, whistleblower policies, and independent board committees.
• Liability Exposure: Executives and directors face potential liability under securities laws for misleading statements or governance failures.

In contrast, private corporations have fewer disclosure obligations, allowing greater flexibility but limiting access to public capital markets.

Frequently Asked Questions

1. What is the main purpose of a public corporation?
   A public corporation is created to serve public needs—either as a government entity providing services or as a business raising capital from public investors.
2. How is a public corporation different from a private one?
   Private corporations restrict ownership and disclosure, while public corporations raise capital through public markets and must follow strict reporting rules.
3. Who regulates public corporations in the U.S.?
   State laws govern incorporation, while the Securities and Exchange Commission (SEC) enforces federal disclosure and securities compliance requirements.
4. Can a public corporation be both government-owned and publicly traded?
   Generally, no. Government-owned public corporations provide services, while publicly traded corporations are private enterprises offering stock to the public.
5. What are the main compliance obligations of public corporations?
   They include filing periodic SEC reports, maintaining independent board oversight, ensuring accurate financial disclosure, and adhering to stock exchange governance rules.

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