What is a Financial Corporation?

James Doehring
James Doehring
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

A financial corporation is a legal entity that is typically formed to generate a profit. It is granted a charter that establishes its privileges and liabilities separate from its members or founders. In many ways, a financial corporation is treated under the law as if it were a real person. Some corporations possess a charter, but are not-for-profit. A financial institution, on the other hand, is a regulated entity that offers financial services.

In ancient Rome, laws were implemented to protect the rights of organizations and for-profit businesses. The word corporation comes from the Latin corpus, which means “body.” Corporations later included churches and charitable organizations that would outlive their individual founders.

Modern corporate law establishes the guidelines under which a financial corporation operates. Financial corporations have a number of different parties involved. Shareholders own part of the corporation by purchasing shares; in fact, the main function of a financial corporation is to return a profit to shareholders. A board of directors supervises the activities of a corporation according to the organization’s bylaws. Creditors lend money to corporations and charge interest.

A defining characteristic of a financial corporation is a legal personality that is separate from that of the members. Corporations are given both rights and responsibilities—for example, a financial corporation can own property and take on debts. Like people, corporations can be said to be “born” and to “die” at definite times. In some legal decisions, however, individuals involved with a corporation can be held responsible for its conduct.

Any not-for-profit organization that is incorporated and registered with the government is considered a not-for-profit corporation. These can include educational and charitable institutions as well as public service corporations. Some electricity generation corporations are non-for-profit. These types of corporations often face difficulties with growth because they lack the profits to invest in expansion.

By contrast, a financial institution is a for-profit institution that offers financial services. In general, financial institutions act as intermediaries between those who want to save or lend money and those who want to borrow it. The function of a bank, for example, is to accept deposits and then offer that money as a loan to someone else. Some of the interest generated from the loan may be given to the original depositor, but some will be kept by the bank as profit. Financial institutions typically have more government regulation than financial corporations due to their crucial role in the economy.

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