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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 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.

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