Incorporated companies have excellent access to capital through capital stock, equity, and limited liability, which contributes to the growth and innovation of startups. However, they also present challenges, such as volatility of capital and decentralization of management, and require transparent management and internal controls.
Stock corporations are the epitome of today’s corporate entity. This is because they have a greater ability to raise capital than other types of companies. Raising capital for a stock corporation involves the essential elements of a stock corporation: capital, shares, and limited liability. The capital of a joint stock company is the basis of its existence and is raised through the issuance of shares. The current Commercial Code does not set a minimum capital limit for the establishment of a joint-stock company, nor does it require the capital to be listed in the articles of association. Instead, the total number of authorized shares must be stated in the articles of incorporation to indicate the maximum amount of capital.
The total number of authorized shares of a corporation is the total number of shares that the company can issue, and the total number of authorized shares is the maximum amount of authorized capital. When establishing a joint stock company, you can issue only a portion of the total number of authorized shares, but all shares must be subscribed. Subscribing for shares refers to determining who the investors are and how many shares they want to subscribe for. Once the investors have subscribed and paid for the shares issued by the company, the sum of those amounts becomes the capital of the corporation. If a company has not yet issued shares out of the total number of authorized shares, it can issue shares at a later date only by a resolution of the board of directors, which is intended to make it easier for the company to raise capital as needed.
Shares are the units of capital, and a corporation can raise large amounts of money from a large number of people by issuing shares. Shares are freely transferable in the stock market, and one share of par value cannot be divided into two or more shares and transferred to another person. When a joint stock company issues par value shares, the par value shares must be uniform in value and the value of one share must be at least 100 won. The total amount of par value shares issued by a joint stock company is equal to the total amount of money paid by the shareholders for the shares when the joint stock company was established.
Shareholders, who are the owners of shares, have limited liability to the company, with rights to profit distributions, etc. in proportion to the amount of shares they hold. Limited liability means that a shareholder bears a limited contribution obligation to the company, limited to the purchase price of the shares, and is not directly liable to the company’s creditors. A shareholder’s limited liability cannot be increased by the articles of incorporation or by a resolution of the general meeting of shareholders. Because of this, in a joint stock company, the only security for the company’s creditors is the property that the company currently owns.
The essential elements of a corporation – capital stock, shares, and limited liability – give it the power to raise capital, but they can also cause economic harm. In some cases, the size of a company’s capital is not a good indicator of its creditworthiness, and the majority shareholders may abuse their power to pursue self-interest and not be held accountable for the company’s losses and the losses of the company’s business partners. In addition, in the event of a company crisis, such as bankruptcy or insolvency, the company’s stakeholders, such as creditors, workers, and consumers, may suffer.
To avoid these problems, the legal rules for joint stock companies establish several principles regarding capitalization. The principle of capital maintenance, also known as the principle of capital fidelity, requires that capital must actually be contributed to the company and that the company must actually maintain the property that constitutes the capital. If there is a situation where the capital is repeatedly invested in different companies, the actual capital is not increased, but only the capital on paper is increased, and the company becomes insolvent and vulnerable to external risks. The principle of capital immutability is that the capital cannot be changed arbitrarily, and it must go through a legal procedure to change the capital. In Korea, the law only requires a board resolution to increase capital, while decreasing capital requires a strict legal process. In addition, the law on joint-stock companies makes it mandatory to implement only what is stipulated in the law, and measures are in place to minimize the disadvantages of joint-stock companies, such as requiring the publication of important information about the company and changes to the articles of association.
In addition, this ability to raise capital is a major contributor to the growth of startups and ventures. By making it easier to raise initial capital through stock issuance, it lowers the barriers for companies with innovative ideas to enter the market. For example, tech startups can raise the necessary funds through the stock market to continue their research and development, which gives them a competitive edge in the market. In this sense, corporations play an important role in the innovation and development of the economy as a whole.
However, their ability to raise capital also has its drawbacks. Depending on the volatility of the stock market, the value of a company can fluctuate rapidly, which can make it difficult for management to plan long-term strategies. Additionally, the increase in outside investors through equity issuance can lead to a decentralization of control, which can hinder management’s ability to make key decisions quickly and consistently. To address these issues, companies sometimes use a strategy of issuing different types of shares to protect management control.
Finally, transparent management and thorough internal controls are essential for the successful operation of a joint stock company. This gives shareholders and investors confidence and allows for sustainable growth. The management of a corporation must ensure the long-term prosperity of the company by responding to legal regulations, market demands, and fulfilling social responsibilities. This will ultimately have a positive impact on the stability and growth of not only the corporation, but also the entire economy.
