A corporation is a legal entity chartered by a state or the federal government and is separate and distinct from the persons who own it. This separation gives rise to the famous jurist’s remark that a corporation has “neither a soul to damn nor a body to kick.” Despite its intangible nature, a corporation is regarded by courts as an artificial person; it can own property, incur debts, sue, or be sued.
Key Characteristics of Corporations
Limited Liability
One of the primary advantages of a corporation is limited liability. Owners, known as shareholders, can only lose what they invest in the business. Unlike partnerships or sole proprietorships, personal assets of shareholders are protected from business liabilities.
Easy Transfer of Ownership
Ownership in a corporation is easily transferable through the sale of shares of stock. This liquidity allows investors to buy and sell ownership stakes without affecting the ongoing operations of the business.
Continuity of Existence
Corporations have perpetual existence, meaning they continue to exist even if the original owners or managers leave or pass away. This perpetuity ensures that the business can operate beyond the lifespan of its initial creators.
Centralized Management
Management of a corporation is typically centralized, with a board of directors and corporate officers overseeing the business’s operations. This structure helps in making strategic decisions more efficiently.
Applicability and Popularity
Corporations are a popular form of organization for several reasons:
- Ability to Obtain Capital: Corporations can raise capital more easily than other business forms through expanded ownership, such as issuing stocks or bonds.
- Shareholder Profits: Shareholders can benefit from the growth of the business through dividends and stock appreciation.
Types of Corporations
- C Corporation: The most common type, facing taxation at both the corporate and shareholder levels (double taxation).
- S Corporation: Avoids double taxation by allowing income to pass through to shareholders, who report it on their personal tax returns.
- Non-Profit Corporation: Operates for educational, charitable, or other purposes without profit distribution to members.
- Professional Corporation: Formed by professionals such as doctors, lawyers, or accountants.
Legal Considerations
Corporations must adhere to a variety of legal requirements, including:
- Articles of Incorporation: Filing essential documents with the state to formally establish the corporation.
- Bylaws: Internal rules governing the corporation’s operation and management.
- Compliance: Adherence to both state and federal laws, including securities regulations and tax obligations.
Historical Context
The concept of a corporation dates back to Roman law, where a corpus was a legal entity that existed separately from its members. The modern corporation evolved significantly during the 19th and 20th centuries, becoming a fundamental component of the global economy.
Comparison with Other Business Entities
- Sole Proprietorship: Owned by one person, easier to form, but owners have unlimited liability.
- Partnership: Owned by two or more people sharing profits, losses, and liabilities.
- Limited Liability Company (LLC): Combines the liability protection of a corporation with the tax benefits of a partnership.
FAQs
Q: What is the primary advantage of a corporation? A: The primary advantage is limited liability, protecting owners’ personal assets from business liabilities.
Q: How does a corporation raise capital? A: By issuing stocks and bonds to investors.
Q: What is double taxation? A: Double taxation refers to income being taxed at both the corporate level and at the shareholder level when dividends are distributed.
Summary
Corporations play a vital role in modern economies due to their ability to limit owners’ liability, facilitate the transfer of ownership, ensure business continuity, and centralize management. Their structure and legal recognition help them attract capital, foster growth, and contribute to economic development. Understanding the nuances of different corporate forms and compliance requirements is essential for anyone engaged in business or investments.
Related Terms
- Shareholders: Owners of shares in a corporation.
- Board of Directors: A group elected to represent shareholders and oversee the management of a corporation.
- Bylaws: Rules governing the internal management of a corporation.
- Dividends: Profits distributed to shareholders.
- Articles of Incorporation: Legal documents filed to create a corporation.
References
- “Corporate Law,” Wikipedia, link.
- “Types of Business Entities,” U.S. Small Business Administration, link.
- “The History of Corporations,” Britannica, link.
This entry on “Corporation” provides a detailed and structured overview of the concept, ensuring a comprehensive understanding for readers interested in law, business, and economics.
