What is a corporation?
When you invest with a business, that business must first be legally registered as a corporation. This is different from a business that is registered as a partnership, or a non-profit for example. It’s important to be aware of this difference as it explains why there are some places you can donate but not invest, for example the United Nations.
A corporation is a group of people that is legally recognised as a single entity. Sometimes a corporation is even referred to as a ‘legal person’ since it must act within the same laws as any ordinary person. For example, a business can enter into contracts, own property, borrow money — and be sued.
The greatest benefit of this option for business owners is that if a corporation goes into debt, it is the corporation that is liable and must repay the debt — not the business owners personally. This is different from a business that’s registered as a partnership where, should the business be unable to pay off its debts, the partners are at risk of losing their personal assets.
How does this relate to investing?
When a corporation starts selling part of their business in the form of securities (stocks and bonds, for example), they first go through an Initial Public Offering (IPO). This means that the public (individuals like you) can start investing in the corporation.
Corporations essentially want people to invest their money in them so they can grow their business. Having shareholders (people who own stock), provides the corporation with more money without taking out loans. Instead, the shareholders own part of the business and share the profits.
For example…
Let’s say Company X develops innovative technology for electric cars and has big plans for the future. In order to grow, the company needs more money. Instead of taking out a loan and paying interest on the loan, the company decides to register as a corporation and go public.
Meanwhile, a new investor wants to invest a portion of the money in a sustainable corporation. They chose Company X because they are passionate about environmental issues such as decreasing pollution.
By having a range of shareholders like this new investor, Company X can use the extra money to invest in R&D to develop their product. As the business grows and makes a profit, investors also see their money grow. Plus with this advancement in technology, there are more electric cars in use.
As an investor, you therefore have a lot of power. You can choose what industries you want to support and invest your money in these. For more about this topic specifically, you can read about ESG investing here.
Kate Harris is a copywriter at MakeImpact, a Nordic Impact Fintech that helps individuals make sustainable investment decisions through their values.
