What Is a Corporation?
A corporation is a legal entity that is separate and distinct from its owners. Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
A distinguishing characteristic of a corporation is limited liability. Its shareholders profit through dividends and stock appreciationbut they are not personally liable for the company's debts.
Almost all large businesses are corporations, including Microsoft Corporation and the Coca-Cola Company.
Key Takeaways
- Corporations possess many of the same legal rights and responsibilities as individuals.
- Limited liability of a corporation means that its shareholders are not personally responsible for the company's debts.
- A corporation may be created by an individual or a group of people.
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Incorporation
A corporation is created when it is incorporated by a group of shareholders with a common goal who share ownership represented by their holding of stock shares.
Corporations may return a profit to their shareholders. Some corporations, such as charities and fraternal organizations, are nonprofit or not-for-profit.
A private or closed corporation may have a single shareholder or several. Publicly traded corporations have many shareholders.
In the U.S., corporations are created and regulated by state laws. Public corporations are regulated by federal law through the Securities and Exchange Commission (SEC).
To their owners, both a limited liability company (LLC) and a corporation have similar legal advantages: they cannot be held personally liable for the debts of either entity.
Legal Requirements
Each state has its own laws regarding incorporation. Most states require the owners to file articles of incorporation with the state and then issue stock to the company's shareholders. The shareholders elect a board of directors in an annual meeting.
Turning a private corporation into a public corporation is complex, as it falls under federal laws requiring full and public disclosure of financial information to potential shareholders and the government.
Operating a Corporation
The shareholders of a corporation typicallyreceiveone vote per share and may hold an annual meeting during which they elect a board of directors. The board hires and oversees the senior management responsible for the corporation's day-to-day activities.
The board of directors executes the corporation's business plan. Although the members are not personallyresponsible for the corporation's debts, they owe a duty of care to the corporation and can incur personal liabilities if they neglect this duty. Some tax statutes also provide for the personal liabilities of the board of directors.
Liquidating a Corporation
The incorporation can be ended using the process called liquidation. This may be a voluntary decision to cease operations or may be forced by the financial collapse of the business. A company appoints a liquidator who sells the corporation's assets. The company pays off its creditors and distributes any remaining money to the shareholders.
An involuntary liquidation is triggered by the creditors of a corporation that has failed to pay its bills. If the situation cannot be resolved, it is followed by a filing for bankruptcy.
What Is a Corporation vs. a Business?
Many businesses are corporations, and vice versa.
A business may seek to incorporate to establish its existence as a legal entity separate from its owners. This means that the owners cannot be held responsible for the debts of the corporation. It also means that the corporation can own assets, sue or be sued, and borrow money.
How Is a Corporation Formed?
To form a corporation in the U.S., it is necessary to file articles of incorporation with the state in which it will be registered. The details vary from state to state.
In the U.K., Ireland, and Canada corporations can use the abbreviation Ltd. (limited) after the company's name. They might also appear as public limited companies (PLCs).
What Is the Difference Between a Limited Liability Company and a Corporation?
Both a limited liability company (LLC) and a corporation are structures that offer similar legal advantages to their owners: they cannot be held liable for the debts of either entity.
An LLC is a "pass-through" entity. That is, its profits and the responsibility to pay taxes on the profits are passed to the owners rather than being paid by the LLC.
Establishing an LLC is a relatively straightforward process. By comparison, a corporation must elect a board of directors, conduct annual meetings, and adopt bylaws.
The Bottom Line
A corporation may be formed by an individual or group with a shared goal and can be a for-profit or not-for-profit entity. Corporations possess many of the same legal rights and responsibilities as individuals. The limited liability nature of a corporation means that its shareholders are not personally responsible for the company's debts.
