Corporation

Definition

A corporation is a legal entity that is separate from its owners, created to conduct business, and has the ability to enter into contracts, sue, and be sued. This distinct legal status offers limited liability protection to its shareholders, meaning that their personal assets are generally protected from the corporation's debts and liabilities. Corporations can raise capital through the sale of stock, allowing for potential growth and expansion beyond what sole proprietorships can typically achieve.

5 Must Know Facts For Your Next Test

1. Corporations can be classified as either C corporations or S corporations, each with different tax implications and regulations.
2. One significant advantage of forming a corporation is its ability to raise capital more easily through the issuance of stock to investors.
3. Unlike sole proprietorships, corporations have perpetual existence, meaning they can continue to exist independently of ownership changes or the death of shareholders.
4. The process of forming a corporation typically involves filing articles of incorporation with the state and complying with ongoing regulatory requirements.
5. Corporations are subject to double taxation, where income is taxed at both the corporate level and again at the individual level when dividends are distributed to shareholders.

Review Questions

• How does the concept of limited liability impact the decisions made by investors when considering whether to invest in a corporation?
  • Limited liability plays a crucial role in attracting investors to corporations, as it ensures that their personal assets are protected from any financial losses incurred by the business. This protection allows investors to take on greater risk without fearing that their personal finances will be affected if the corporation fails. Consequently, this can lead to more substantial investments in corporate ventures compared to other business structures like sole proprietorships, where owners bear full responsibility for debts.
• Discuss how the structure of a corporation differs from that of a sole proprietorship, focusing on governance and liability aspects.
  • Corporations differ significantly from sole proprietorships in terms of governance and liability. In a corporation, ownership is shared among multiple shareholders, who elect a board of directors to manage the company's operations and make key decisions. This creates a separation between ownership and management. In contrast, a sole proprietorship is owned and operated by one individual who bears full personal liability for all debts. This means that in a sole proprietorship, personal assets could be at risk if the business incurs debt, whereas shareholders in a corporation enjoy limited liability protection.
• Evaluate the implications of double taxation for corporations and their shareholders, particularly in relation to investment strategies.
  • Double taxation presents unique challenges for corporations and their shareholders as it means that corporate income is taxed at the company level before dividends are distributed to shareholders, who then pay taxes on those dividends as personal income. This can influence investment strategies, as some investors may prefer companies that retain earnings for growth instead of paying out dividends. Additionally, understanding this tax structure can lead investors to seek out S corporations or other tax-advantaged entities where possible to minimize their tax liabilities while still investing in corporate ventures.

Related terms

shareholder: An individual or entity that owns shares in a corporation, entitling them to a portion of the company's profits and voting rights in corporate decisions.

limited liability:

A legal principle that protects shareholders from being personally liable for a corporation's debts beyond their investment in the company.

board of directors:

A group of individuals elected by shareholders to oversee the management of a corporation and make major decisions on behalf of the company.