Corporation

Definition

A corporation is a legal entity that is separate from its owners, created under state law to conduct business. This structure allows corporations to enter contracts, own assets, incur liabilities, and be sued or sue in their own name. Corporations are designed to limit the personal liability of their shareholders while providing a way to raise capital through the sale of stock.

5 Must Know Facts For Your Next Test

1. Corporations can be classified as either C corporations or S corporations, with C corporations facing double taxation on profits while S corporations pass income directly to shareholders to avoid this issue.
2. The corporate structure allows for perpetual existence, meaning the corporation can continue to exist independently of its owners' involvement or death.
3. To form a corporation, owners must file articles of incorporation with the appropriate state authority and comply with state laws regarding corporate governance.
4. Corporations are governed by a board of directors, who are elected by shareholders and responsible for making major decisions for the company.
5. While corporations provide limited liability protection to shareholders, they are also subject to more regulatory scrutiny and reporting requirements compared to other business entities.

Review Questions

• How does the concept of limited liability benefit shareholders in a corporation?
  • Limited liability benefits shareholders by protecting their personal assets from the corporation's debts and liabilities. This means that if the corporation faces financial trouble or legal issues, shareholders only risk losing their investment in the company's stock rather than their personal property. This encourages investment in businesses by minimizing potential financial risks for individuals.
• Compare and contrast C corporations and S corporations in terms of taxation and ownership structure.
  • C corporations are taxed as separate entities, leading to double taxation on corporate profits—first at the corporate level and then again when dividends are distributed to shareholders. In contrast, S corporations are pass-through entities where profits are taxed only at the individual shareholder level, avoiding double taxation. Additionally, S corporations have restrictions on ownership, limiting the number of shareholders and requiring them to be U.S. citizens or residents, while C corporations can have an unlimited number of shareholders and different classes of stock.
• Evaluate the impact of corporate governance structures on decision-making within a corporation.
  • Corporate governance structures significantly influence decision-making by establishing who has authority over major company decisions. The board of directors plays a crucial role in overseeing management actions and protecting shareholder interests. However, if not managed effectively, governance structures can lead to conflicts of interest between management and shareholders. Therefore, strong corporate governance is essential for ensuring transparency and accountability, promoting long-term growth, and aligning interests between various stakeholders.

Related terms

shareholder: An individual or entity that owns shares in a corporation, giving them a claim on part of the corporation's assets and profits.

limited liability:

A legal principle that protects shareholders from being personally liable for the debts and liabilities of the corporation beyond their investment in shares.

articles of incorporation: A legal document filed with a state government to create a corporation, detailing the corporation's name, purpose, structure, and the number of authorized shares.