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.
Related Terms§
- 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§
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
