Corporation

Definition

A corporation is a legal entity that is separate and distinct from its owners, allowing it to own property, enter contracts, and be liable for debts independently. This structure provides limited liability to its shareholders, meaning that their personal assets are typically protected from business liabilities. Corporations can raise capital more easily than other business forms through the sale of stock, making them an attractive option for larger ventures and investors.

5 Must Know Facts For Your Next Test

1. Corporations can be classified into different types, such as C-corporations and S-corporations, each having distinct tax implications.
2. A corporation is formed by filing articles of incorporation with the state, which establishes it as a legal entity.
3. Shareholders in a corporation elect a board of directors who are responsible for making major decisions and overseeing corporate management.
4. Dividends paid to shareholders can be taxed at both the corporate level and the individual level, leading to double taxation.
5. Many corporations have perpetual existence, meaning they can continue indefinitely regardless of changes in ownership or management.

Review Questions

• How does the concept of limited liability protect shareholders in a corporation?
  • Limited liability means that shareholders are only financially responsible for the debts of the corporation up to the amount they invested in shares. This protection allows individuals to invest in a corporation without risking their personal assets, such as homes or savings, if the business encounters financial trouble. This feature makes investing in corporations more appealing and encourages entrepreneurial endeavors while safeguarding personal finances.
• Discuss the implications of double taxation for C-corporations and how this affects shareholder returns.
  • Double taxation occurs when corporate profits are taxed at the corporate level before dividends are distributed to shareholders, who then pay taxes on those dividends as personal income. This situation can significantly affect shareholder returns because it reduces the amount of profit that ultimately reaches investors. As a result, shareholders may weigh this factor against the benefits of limited liability and capital-raising opportunities that come with being part of a corporation.
• Evaluate how the flexibility in raising capital through stock sales impacts a corporation's growth potential compared to sole proprietorships or partnerships.
  • The ability to issue stocks allows corporations to attract investment from a larger pool of investors compared to sole proprietorships or partnerships, which typically rely on personal savings or loans. This flexibility in capital raising enables corporations to fund expansion projects, research and development, or acquisitions more effectively. Consequently, this can lead to faster growth rates and a competitive advantage in various industries, as corporations can scale operations more rapidly by leveraging external funding sources.

Related terms

Limited Liability: A legal structure that protects an individual's personal assets from being used to satisfy business debts or liabilities.

Shareholders: Individuals or entities that own shares in a corporation and have an interest in its profits and decision-making.

C-Corporation: A specific type of corporation that is taxed separately from its owners under Subchapter C of the Internal Revenue Code.