Corporations

Definition

Corporations are legal entities that are separate and distinct from their owners, providing limited liability to shareholders. They can own assets, incur liabilities, and enter into contracts independently of their owners.

5 Must Know Facts For Your Next Test

1. Corporations issue shares of stock to raise capital.
2. Shareholders have limited liability, meaning they are not personally responsible for corporate debts.
3. Corporations are subject to double taxation - profits are taxed at the corporate level and dividends at the shareholder level.
4. The Board of Directors governs a corporation and makes major decisions.
5. Retained earnings in a corporation represent the cumulative net income that has been retained rather than distributed as dividends.

Review Questions

• What is the primary reason corporations issue shares of stock?
• How does limited liability benefit shareholders?
• Explain what retained earnings represent in a corporation.

Related terms

Shareholder Equity: Represents the residual interest in the assets of a corporation after deducting liabilities.

Dividends:

Payments made by a corporation to its shareholders from profits or retained earnings.

Board of Directors: A group elected by shareholders responsible for making major decisions and overseeing management in a corporation.