Corporation
Definition
A corporation is a legal entity that is separate and distinct from its owners. It is created by law and has most of the rights and responsibilities that an individual possesses: it can own property, incur debt, sue and be sued. Corporations are characterized by certain key attributes:
- Limited Liability: Owners (shareholders) are not personally liable for the corporation’s debts and liabilities.
- Perpetual Life: The corporation continues to exist even if ownership or management changes.
- Freely Transferable Shares: Ownership can be transferred through the sale of shares without affecting the corporation’s operations.
- Centralized Management: A board of directors oversees and manages the corporation’s affairs.
Example
Abel wants to start a real estate brokerage business with $100,000 of his own money. He asks his attorney to form a corporation with Abel as the sole stockholder. If the corporation should go bankrupt, Abel’s other assets will not be affected.
Frequently Asked Questions (FAQs)
Q1: What are the advantages of forming a corporation?
A1: The primary advantages include limited liability for shareholders, perpetual existence, easier capital accumulation through the sale of stock, and a centralized structure of governance and management.
Q2: Can a corporation be sued separately from its owners?
A2: Yes, a corporation can be sued as its own legal entity, separate from its owners/shareholders.
Q3: How is a corporation formed?
A3: Generally, forming a corporation involves filing articles of incorporation with the state’s secretary of state or equivalent agency, and creating corporate bylaws that govern its operations.
Q4: What is the meaning of ‘perpetual life’ in the context of a corporation?
A4: Perpetual life means that the corporation can continue indefinitely, beyond the lives of its shareholders and managers.
Q5: Does a corporation have to pay taxes?
A5: Yes, corporations are subject to corporate taxes on their profits. Additionally, shareholders may also have to pay taxes on any dividends received, leading to double taxation.
- Limited Liability Company (LLC): A business structure that combines the limited liability of a corporation with the tax benefits and operational flexibility of a partnership.
- Shareholders: Individuals or entities that own shares in a corporation, entitling them to a part of the corporation’s profits and assets.
- Board of Directors: A group elected by shareholders to make major decisions and oversee the general management and operations of a corporation.
- Bylaws: Internal rules adopted by a corporation or other entity for its self-government.
Online Resources
- U.S. Small Business Administration - Types of Business Structures
- Investopedia - Corporation Definition
- IRS - Forms and Instructions for Corporations
References
- U.S. Small Business Administration
- Internal Revenue Service
- Investopedia Corporate Structure
Suggested Books for Further Studies
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe
- “The Law of Corporations and Other Business Organizations” by Angela Schneeman
- “Business Organizations: Corporations, Partnerships, LLCs” by J. Mark Ramseyer and Stephen M. Bainbridge
Real Estate Basics: Corporation Fundamentals Quiz
### What is one of the main benefits of forming a corporation in real estate?
- [ ] It allows immediate capitalization without any legal scrutiny.
- [x] It provides limited liability protection to its shareholders.
- [ ] It guarantees a high return on investment.
- [ ] It avoids all taxes for the initial five years.
> **Explanation:** One of the main benefits of forming a corporation is that it provides limited liability protection to its shareholders. This protects personal assets from any business liabilities.
### What happens to a corporation upon the death of its owner?
- [ ] The corporation automatically dissolves.
- [ ] All assets are liquidated.
- [ ] The corporation must file for bankruptcy.
- [x] It continues to exist independently of its owner's life.
> **Explanation:** A corporation has perpetual life, meaning it continues to exist independent of the owners’ lives. It does not dissolve upon the death of an owner.
### Who manages the corporation?
- [ ] Shareholders directly manage its day-to-day operations.
- [ ] Bankers and financiers handle the daily tasks.
- [x] The board of directors oversees and manages the corporation.
- [ ] State authorities monitor operations constantly.
> **Explanation:** The board of directors is responsible for overseeing and managing a corporation. They make key strategic decisions and appoint officers responsible for daily operations.
### What is required to form a corporation?
- [ ] A minimal equity capital of $1 million.
- [ ] Approval from federal authorities.
- [ ] A lease agreement for office space.
- [x] Filing articles of incorporation with the state.
> **Explanation:** Forming a corporation typically involves filing articles of incorporation with the state’s secretary of state or equivalent agency, among other potential requirements based on jurisdiction.
### What makes shares in a corporation appealing to investors?
- [ ] Guaranteed high dividends.
- [ ] Immediate ownership control.
- [x] The ability to freely transfer shares.
- [ ] Exemption from all forms of taxes.
> **Explanation:** One appeal of shares in a corporation is that they can be freely transferred, making investment in the corporation more flexible and liquid.
### Who can be considered owners in a corporation?
- [ ] Only the founders.
- [x] Shareholders.
- [ ] Only the board of directors.
- [ ] Only managers and employees.
> **Explanation:** The shareholders are considered the owners of a corporation. They hold shares representing portions of the corporate ownership.
### What type of legal protection does a corporation offer to its owners?
- [ ] Complete immunity from all business-related lawsuits.
- [ ] No taxation on dividends.
- [ ] Guaranteed return rates on investments.
- [x] Limited liability protection.
> **Explanation:** A corporation offers limited liability protection to its owners, meaning their personal assets are protected from business liabilities and debts.
### What kind of tax structure primarily affects corporations?
- [x] Double taxation.
- [ ] Single taxation on net income only.
- [ ] Higher tax rates for less profitable businesses.
- [ ] No tax imposition at state level.
> **Explanation:** Corporations often face double taxation. Profits are taxed at the corporate level and dividends paid to shareholders are also taxed at the individual level.
### Why might a corporation choose to maintain a board of directors?
- [ ] To avoid paying taxes.
- [ ] To manage daily financial transactions.
- [x] To provide oversight and strategic direction.
- [ ] To attract government subsidies.
> **Explanation:** A board of directors provides oversight and strategic direction, helping keep the corporation on track with its long-term goals and governance standards.
### Which document governs the operations and internal rules of a corporation?
- [ ] Articles of Incorporation.
- [x] Bylaws.
- [ ] Memorandum of Association.
- [ ] Stockholder Agreement.
> **Explanation:** Bylaws are the internal rules that govern the operations, management, and procedures of a corporation. They work alongside the Articles of Incorporation.
