What is a Public Corporation?

A public corporation is a corporation owned by members of the public by virtue of their having purchased shares in its ownership on the open market. Public corporations sell shares in their ownership because large amounts of capital can be raised very quickly with a public stock offering. In the United States, many aspects of a public corporation's operations, especially its relationship with its shareholders, are closely scrutinized and regulated by the Securities and Exchange Commission (SEC), an agency established by the US government in 1934, as part of its response to the great depression, to regulate the stock markets and prevent abuses by corporations.

To become a public corporation, a business must first incorporate – that is, become a corporation. Incorporation is a legal process that gives the company an official legal personality. Corporations may thus be characterized as a fictional person, a legal person, or a moral person, as opposed to a natural person. Corporations have many of the same rights as natural people, such as signing contracts, and many of the same responsibilities: corporations must obey the same laws as everyone else, as well as corporate laws enacted to govern corporate behavior. They may not vote, however, and are not expected to sit on juries, although they are taxed.

Three features common to any incorporated firm is that leadership is vested in a board of directors, ownership is shared among those who've contributed capital to the corporation, and that ownership can be exchanged via the sale or transfer of shares of stock. Only the shares of a public corporation may be sold to the public in the open market, though.

Once incorporated, a corporation must then request approval from the SEC to offer its shares to the public on one of the major exchanges. When approval is granted, the shares are sold by the corporation to the public in an Initial Public Offering (“IPO”). The proceeds of the sales in the IPO go back to the company, which is the reason for selling shares in the first place; many IPOs have raised billions of US Dollars (USD) for the corporations issuing them. Subsequent sales of the corporation's stock are usually between investors, and none of the money involved in those transactions goes back to the corporation. Many corporations retain ownership of some of their stock to sell at a future date to raise money.

While a public corporation sells shares in its ownership to raise money quickly, members of the public usually buy those shares in anticipation of the investment gaining value over time. This can happen in two different ways. The first is appreciation of the stock price itself &emdash; the price of a company's stock reflects its fortunes in the marketplace &emdash; and when a company does well, its stock generally increases in value. The second is the anticipation of dividends &emdash; periodic payments made by many corporations to their shareholders. These payments are determined by the corporation's board of directors and are based on the corporation's performance.

While shares of stock in any public corporation may periodically decline in value, stock ownership in general, and especially of a portfolio consisting of many different stocks, is usually considered a safe long term investment because in the past, such investments generally have performed very well over time.