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 individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. Some refer to it as a "legal person."

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Corporation

How Corporations Work

All kinds of businesses around the world use corporations. While its exact legal status varies somewhat from jurisdiction to jurisdiction, a corporation's most important aspect is limited liability. This means that shareholders may take part in the profits through dividends and stock appreciation but are not 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.

The 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, to pursue a common goal. A corporation's goals can be for-profit or not, as with charities. However, the vast majority of corporations aim to provide 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. With 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 a C Corporation.

Becoming a Corporation

The process for forming a corporation varies according to the state you do business in and the state you live in. For the most part, you'll need to file articles of incorporation with the state, and then issue stock to the company's shareholders. The shareholders will elect the board of directors in an annual meeting.

The Day-to-Day Operations of a Corporation

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

The board of directors executes the corporation's business plan and must take all the means to do so. Although the members of the board are not generally responsible 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.

Key Takeaways

  • Corporations are often considered "legal persons."
  • An important element of a corporation is limited liability.
  • Corporations are mot always for profit.

Special Considerations: The 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 company appoints a liquidator who sells the corporation's assets, then the company pays any creditors and gives any remaining assets to the shareholders.

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