What Is a Corporation?

What Is a Corporation?

Let me tell you directly: a corporation is a legal entity that's completely separate from its owners, set up to handle business or trade. It files its own tax returns with the IRS, just like an individual would.

You form one by filing articles of incorporation in the state where you plan to operate. Once established, corporations can sign contracts, borrow or lend money, sue or be sued, hire staff, own property, and pay taxes—all on their own behalf.

Here's the key point I want you to grasp: corporations give their owners limited liability protection. As a shareholder, you can profit from dividends and rising stock values, but you're not personally on the hook for the company's legal or financial troubles. Think of big names like Microsoft or Coca-Cola—they're all corporations.

Key Takeaways

Corporations have many of the same rights and duties as people do. You can create one alone or with a group, but you must file articles of incorporation in the state where it'll be based and run. Remember, the managers and shareholders aren't personally liable for the company's legal or financial issues.

How a Corporation Works

A corporation comes into being when you or a group of shareholders incorporate a business with a shared purpose. Ownership is divided among shareholders through stock shares.

These entities can generate profits for shareholders, though some, like charities or fraternal groups, operate as nonprofits. A private corporation might have just one shareholder or a few, while public ones have many. In the U.S., states regulate how corporations are created and run, and public ones fall under federal oversight by the SEC.

I should point out that for owners, a corporation offers similar legal perks as an LLC, mainly that shareholders aren't personally liable for liabilities—except in rare cases of serious misconduct.

Advantages and Disadvantages of Forming a Corporation

On the plus side, owners get limited liability, you can raise money by selling shares, some get favorable tax treatment, and it's easier to recruit employees.

On the downside, it's time-consuming to set up and run, involves lots of paperwork, costs money to form, and some face double taxation.

Legal Requirements of Corporations

Each state has its own rules for incorporation, but most require filing articles of incorporation and issuing stock to shareholders. Shareholders then elect a board of directors annually.

If you're turning a private corporation public, it's more involved—you have to follow federal laws for disclosing financial info to potential investors and the government.

Operating a Corporation

Shareholders get one vote per share and can hold annual meetings to elect the board. The board hires and supervises senior management for daily operations and carries out the business plan.

Board members aren't personally liable for the corporation's debts, but they have a duty of care and could face consequences if they neglect it. Some tax laws might hold them personally responsible for certain liabilities.

Liquidating a Corporation

You can end a corporation through liquidation, either voluntarily to stop operations or forced by financial failure. A liquidator sells assets, pays creditors, and distributes what's left to shareholders. If creditors trigger it due to unpaid bills, it might lead to bankruptcy if unresolved.

What's the Difference Between a Corporation and a Business?

Many businesses are corporations, but not all. A business can run without incorporating, but incorporating separates it legally from owners, shielding them from liabilities.

How Is a Corporation Formed?

In the U.S., file articles of incorporation in the chosen state. Details differ by state. In places like the U.K., Ireland, or Canada, companies use 'Ltd.' for limited or appear as public limited companies (PLCs).

What Is the Difference Between a Limited Liability Company and a Corporation?

Both provide limited liability to owners. An LLC is a pass-through entity where profits and taxes go directly to owners, and it's simpler to set up. A corporation requires a board, annual meetings, and bylaws.

The Bottom Line

You can form a corporation alone or with others for profit or nonprofit goals. It has individual-like rights and responsibilities, with limited liability meaning executives, managers, and shareholders aren't personally liable—unless there's extreme misconduct.