Corporation

Definition

A corporation is a legal entity that is separate and distinct from its owners, typically organized for the purpose of conducting business. It has its own rights and responsibilities, allowing it to enter contracts, sue or be sued, and own assets. Corporations provide limited liability protection to their shareholders, meaning that the personal assets of the shareholders are generally protected from the corporation's debts and liabilities.

5 Must Know Facts For Your Next Test

1. Corporations can be classified as C corporations or S corporations, with C corporations being subject to double taxation on corporate profits, while S corporations allow profits to be passed directly to shareholders to avoid double taxation.
2. The formation of a corporation involves filing articles of incorporation with the appropriate state authority and paying any required fees.
3. Corporations are governed by a board of directors, which is responsible for making major decisions and overseeing the management of the company.
4. Shareholders can influence corporate decisions through voting rights associated with their shares, including the election of board members.
5. Some corporations can qualify for special tax treatment under the IRS as 'pass-through' entities, which allows them to avoid corporate income tax by passing income directly to shareholders.

Review Questions

• How does the concept of limited liability benefit shareholders in a corporation?
  • Limited liability protects shareholders by ensuring that they are only responsible for the corporation's debts up to the amount they have invested in shares. This means that if the corporation faces financial difficulties or legal issues, shareholders' personal assets are generally safe from creditors. It encourages investment in businesses because individuals can participate without risking their entire wealth.
• Discuss the significance of articles of incorporation in establishing a corporation and what essential information they typically contain.
  • Articles of incorporation are crucial because they formally establish a corporation's existence under state law. They usually contain essential details such as the corporation's name, purpose, registered agent, and share structure. This document serves as a foundational legal requirement that allows the corporation to operate and be recognized as a separate entity distinct from its owners.
• Evaluate the implications of choosing between a C corporation and an S corporation regarding taxation and ownership structure.
  • Choosing between a C corporation and an S corporation has significant implications for taxation and ownership. A C corporation faces double taxation, meaning both corporate profits and dividends paid to shareholders are taxed, while an S corporation allows profits to pass through directly to shareholders, avoiding this double tax. Additionally, S corporations have restrictions on the number and type of shareholders they can have, whereas C corporations can have unlimited shareholders and various classes of stock. This choice affects not only tax obligations but also how much control owners retain over their business.

Related terms

shareholder: An individual or entity that owns shares in a corporation, making them part-owners and entitled to a portion of the profits.

limited liability: A legal structure that protects shareholders from being personally liable for the corporation's debts beyond their investment in shares.

articles of incorporation: The formal documents filed with a state government to legally establish a corporation, outlining its purpose, structure, and operational guidelines.