A corporation is a distinct legal entity, separate from its owners. Legally, corporations possess many of the same rights and responsibilities as individuals, including the ability to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
A key feature of a corporation is limited liability. Shareholders benefit from profits through dividends and stock appreciation but are not personally liable for the company’s debts.
Nearly all major enterprises operate as corporations, such as Microsoft and The Coca-Cola Company.
Key Takeaways
- Corporations possess many of the same legal rights and responsibilities as individuals.
- The limited liability aspect 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.
Incorporation
A corporation is officially formed when it is incorporated by shareholders with a common goal. These shareholders own the business as represented by their shares of stock.
Corporations may return profits to shareholders but can also operate as nonprofit organizations, such as charities or fraternal organizations.
A private or closed corporation may contain a single shareholder or several, while publicly traded corporations have countless shareholders. In the U.S., state laws govern the creation of corporations, with public corporations also falling under federal regulations set by the SEC.
Both limited liability companies (LLCs) and corporations offer similar advantages, including the primary benefit that shareholders are not personally liable for the entity’s debts.
Legal Requirements
Incorporation laws vary by state, but generally, owners must file articles of incorporation and issue stock to shareholders. These shareholders elect a board of directors in an annual meeting.
Converting from a private to a public corporation involves adhering to federal regulations that mandate full disclosure of financial information to potential shareholders and governmental bodies.
Operating a Corporation
Shareholders typically get one vote per share and hold annual meetings to elect a board of directors. This board hires and supervises senior management, who handle daily operations and strategic planning.
While directors are not personally liable for the corporation’s debts, they owe a duty of care to the organization and could face personal liabilities for negligence or violations of tax statutes.
Liquidating a Corporation
Liquidation ends the corporate existence, either voluntarily or due to financial collapse. A liquidator is appointed to sell off assets, settle debts, and distribute remaining funds to shareholders.
Involuntary liquidation is initiated by creditors if a corporation cannot meet its debt obligations, often followed by bankruptcy if the situation remains unresolved.
Corporation vs. Business
While many businesses are incorporated, some may opt to operate without incorporating. Incorporation shields owners from personal liability for corporate debts, enables asset ownership, and provides the ability to sue or be sued and to borrow money.
Forming a Corporation
In the U.S., one must file articles of incorporation with the state where the corporation will be registered. Different countries, like the U.K., Ireland, and Canada, have various forms such as Ltd. or PLCs.
LLC vs. Corporation
Although both LLCs and corporations offer limited liability, the former operates as a pass-through entity, where profits and tax responsibilities pass to the owners. Forming an LLC is simpler in comparison to establishing a corporation, which requires electing a board, holding annual meetings, and adherence to more stringent regulations.
Bottom Line
A corporation can be formed by individuals or groups with shared objectives and may operate for profit or as a nonprofit entity. The limited liability nature of corporations protects shareholders from personal liability for business debts.
Related Terms: LLC, public corporation, private corporation, articles of incorporation, board of directors.
References
- U.S. Securities and Exchange Commission. “What Does it Mean to Be a Public Company?”
- U.S. Small Business Administration. “Choose a Business Structure”.
- Internal Revenue Service. “Definition of a Corporation”.
- U.S. Securities and Exchange Commission. “Shareholder Voting”.
- American Bar Association. “Model Business Corporation Act, Subchapter C, Directors”, Pages 16-17.
- Internal Revenue Service. “Chapter 7 Bankruptcy: Liquidation Under the Bankruptcy Code”.
- U.S. Small Business Administration. “Register Your Business”.
- Rocket Lawyer. “What Are the Differences Between PLCs and LTDs”.
- Internal Revenue Service. “LLC Filing as a Corporation or Partnership”.
