Key Takeaways
- Separate legal entity with perpetual existence.
- Shareholders have limited liability protection.
- Raises capital by issuing stock.
- Subject to corporate taxation rules.
What is Corporation?
A corporation is a legal entity separate from its owners, authorized by state law to operate independently by owning assets, entering contracts, and assuming liabilities. This structure provides limited liability protection to shareholders, allowing the business to exist perpetually beyond the involvement of its founders.
Corporations can issue stock to raise capital, making them distinct from other forms like sole proprietorships or partnerships. For example, a Apple corporation can attract investors through stock offerings.
Key Characteristics
Corporations have several defining features that impact their operation and governance:
- Limited liability: Shareholders are only liable up to their investment, protecting personal assets from corporate debts or lawsuits.
- Separate legal identity: The corporation exists independently of its shareholders, ensuring continuity despite ownership changes.
- Perpetual duration: Corporations continue indefinitely unless formally dissolved, enabling long-term planning.
- Capital raising: Corporations can issue stock to attract investors, as seen with Microsoft.
- Taxation: Corporations file their own tax returns; some, like C-corporations, face double taxation on profits and dividends.
- Governance structure: Requires a board of directors, bylaws, and regular meetings to comply with fiduciary duties.
How It Works
Forming a corporation involves registering with a state agency by filing Articles of Incorporation and appointing a registered agent. Once established, the corporation issues stock to shareholders, who elect a board of directors to oversee management and ensure compliance with fiduciary responsibilities.
Corporations must comply with ongoing legal and tax obligations, including annual reports and tax filings. They can raise funds by selling shares, which provides flexibility for growth compared to other structures like a DAC (designated activity company).
Examples and Use Cases
Corporations are prevalent across industries, particularly among large public companies and investor-backed startups:
- Technology: Apple and Microsoft utilize the corporation structure to access capital markets and maintain governance standards.
- Banking: Citigroup operates as a corporation to manage extensive liabilities and regulatory requirements.
- Investment: Large-cap stocks, such as those listed in our best large-cap stocks guide, are typically corporations offering liquidity and investor protection.
Important Considerations
While corporations offer benefits like liability protection and capital access, they come with increased regulatory and administrative responsibilities. You should weigh the costs of compliance, such as double taxation for C-corporations, against your business goals.
Understanding the distinctions between corporate types and consulting with legal or financial advisors can help you choose the optimal structure for your enterprise’s growth and governance needs.
Final Words
Corporations provide strong liability protection and capital-raising opportunities but come with regulatory complexities and tax considerations. Evaluate your business goals and consult a financial advisor to determine which corporate structure aligns best with your growth and operational needs.
Frequently Asked Questions
A corporation is a legal entity separate from its owners, authorized by state law to act independently. Unlike sole proprietorships or partnerships, it provides limited liability protection, can own assets, enter contracts, and continue indefinitely regardless of ownership changes.
Corporations offer limited liability protection, meaning shareholders risk only their investment. They have perpetual existence, can raise capital by issuing stock, and have a separate legal identity that allows them to sue or be sued independently.
Common types include C-Corporations, which face double taxation but allow unlimited shareholders; S-Corporations, which offer pass-through taxation with ownership restrictions; B-Corporations, focusing on social and environmental standards; and Non-profits, which operate for public benefit without shareholder profit.
C-Corporations pay taxes on profits and shareholders are taxed again on dividends, causing double taxation. S-Corporations avoid this by allowing profits and losses to pass through to shareholders’ personal tax returns, but they have restrictions on the number and type of shareholders.
To form a corporation, you need to choose and reserve a unique name, select a registered agent, file Articles of Incorporation with the state, and draft bylaws outlining governance. Fees typically range from $100 to $800 depending on the state.
Corporations must have a board of directors, hold shareholder meetings, maintain bylaws, and keep records according to state laws. These formalities help ensure proper management and compliance with legal standards.
Corporations are often preferred for larger, investor-backed ventures because they can issue stock and have perpetual existence. Although they have more formalities than LLCs, corporations offer stronger options for raising capital and structuring ownership.
