Loading the player...

What is a 'Corporation'

A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a "legal person."

BREAKING DOWN 'Corporation'

Corporations are used throughout the world to operate all kinds of businesses. While its exact legal status varies somewhat from jurisdiction to jurisdiction, the most important aspect of a corporation is limited liability. This means that shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts.

Almost all well-known businesses are corporations, including Microsoft Corporation, The Coca-Cola Company and Toyota Motor Corporation. Some corporations do business under their names and also under business names, such as Alphabet Inc., which famously does business as Google.

Creation of a Corporation

A corporation is created when it is incorporated by a group of shareholders who have ownership of the corporation, represented by their holding of common stock, in order to pursue a common objective. A corporation's objectives can be for profit or not, as is the case with charities. However, the vast majority of corporations are set up with the goal of providing a return for its shareholders. Shareholders, as owners of a percentage of the corporation, are only responsible for the payment of their shares to the company's treasury upon issuance.

A corporation can have a single shareholder or several. In the case of publicly traded corporations, there are often thousands of shareholders.

Corporations are created and regulated under corporate laws in their jurisdictions of residence. In the United States, the most common type of corporation is known as a "C Corporation."

Day-to-day Operations of a Corporation

The shareholders, generally receiving one vote per share, annually elect a board of directors that appoints and oversees management of the day-to-day activities of the corporation.

The board of directors is responsible for executing the corporation's business plan and must take all of the necessary means to do so. Although the members of the board are not generally responsible for the corporation's debts, they do 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 board of directors.

Liquidation of a Corporation

When the corporation has reached its objectives, its legal life can be terminated using a process called liquidation or winding up. Essentially, a liquidator is appointed, the corporation's assets are sold, the creditors are paid, and any remaining assets are given to the shareholders.

The liquidation process can be voluntary or involuntary. If it is involuntary, it is usually triggered by the creditors of an insolvent corporation and may lead to bankruptcy of the corporation.

RELATED TERMS
  1. Incorporation

    Incorporation is the legal process used to form a corporate entity ...
  2. Close Corporation Plan

    A close corporation plan is a form of business buy-sell agreement. ...
  3. Company

    A company is a legal entity formed by a group of individuals ...
  4. Shareholder

    A shareholder is any person, company, or institution that owns ...
  5. Corporate Charter

    A corporate charter sets forth a corporation's basic information, ...
  6. Corporate Governance

    Corporate governance is the structure of rules, practices and ...
Related Articles
  1. Investing

    LLC versus incorporation: Which should I choose?

    Learn about the advantages of forming an LLC over a corporation, including ease of administration, and the advantages that a corporation may offer.
  2. Taxes

    The Benefits Of Corporate Inversion

    Many U.S. companies have found it advantageous to relocate their headquarters rather than face the highest corporate tax rates in the world regardless of whether income was earned domestically ...
  3. Taxes

    Taxes in California for Small Business: The Basics

    Understand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
  4. Taxes

    How Large Corporations Get Around Paying Taxes

    With the high tax rate of 35% imposed on large corporations in America, these companies still end up paying way below this rate.
  5. Investing

    How Your Vote Can Change Corporate Policy

    Shareholders are getting a bigger say in how companies are run. Find out how you can be heard.
  6. Investing

    An Introduction To Corporate Bond ETFs

    Learn about the pros and cons of these specialized ETFs, and get in on the opportunities they can provide.
  7. Investing

    Corporate High-Yield Bonds Vs. Equities

    Equities and corporate bonds often play a significant role in the diversification of a portfolio.
  8. Small Business

    Foreigner Starting A Business In The U.S.?

    Keep these four startup steps in mind before you do.
RELATED FAQS
  1. Who is responsible for protecting and managing shareholders' interests?

    Several parties are supposed to be responsible for protecting and managing shareholders' interests, including the company's ... Read Answer >>
  2. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center