Corporation: Definition & Meaning

KEY TAKEAWAYS

• Legally speaking, a company is an independent and distinct entity from its owners. Many of the same legal rights and obligations apply to corporations as they do to people.
• Limited liability prevents its shareholders from being held personally liable for the company’s obligations. This is a crucial component of a corporation.
• An individual or group of individuals with a common objective may establish a corporation. That does not always involve making a profit.

What Is a Corporation?

A corporation is a legitimate entity with its own existence apart from its owners. Corporations have many of the same legal rights and duties as humans. They have the legal authority to enter into agreements, give and receive loans. As well as file lawsuits, employ people, own property, and file taxes.

A corporation is sometimes referred to as a “legal person.”

Types of Corporations

Different sorts of corporations exist. A corporation is a legally created organization. It allows shareholders to have an interest in and control it through the purchase of shares.

Types of corporations include:

• C-corporations
• S-corporations
• Limited liability company
• Non-profit

How Does a Corporation Work?

The precise legal definition of a corporation differs from one jurisdiction to another. Although limited liability is always considered to be its most important component. This indicates that shareholders are not individually liable for the obligations of the company. This is despite the possibility of dividends and stock appreciation.

How to Form a Corporation

When a group of shareholders establishes a business with the desire to pursue a common goal and share ownership of the company, as shown by their ownership of stock shares, a corporation is created.

The vast majority of companies aim to increase shareholder value. However, certain companies, such as nonprofit organizations or fraternal societies, are nonprofit or not-for-profit.

Operations of a Corporation

A corporation’s shareholders normally have one vote per share.

They hold an annual meeting where the board of directors is chosen. The senior management team, which is in charge of the corporation’s daily operations, is hired and supervised by the board.

The business plan of the corporation is carried out by the board of directors. They are not personally liable for the corporation’s obligations. However, the board members have a duty to the company and risk personal liability if they fail in that duty.

Liquidation of a Corporation

A procedure known as liquidation can be used to dissolve a corporation’s legal existence. This choice to halt operations could have been made voluntarily or could have been forced by the company’s financial collapse.

In essence, a firm names a liquidator to sell the business’s assets. Any creditors are paid by the corporation, and any money left over is given to the shareholders.

Pros and Cons of a Corporation

Advantages

There are a number of advantages that come with forming a corporation. These include:

Personal Liability Protection

More than any other entity, a corporation shields its owners’ personal assets from liabilities. For instance, even if a business doesn’t have enough money in assets to cover its debts, its stockholders are not held personally liable in the event of a lawsuit. One of the primary justifications for firms choosing to incorporate is personal liability protection.

Access to Capital

Since publicly listed stock is how most firms sell ownership, they can readily raise money by selling stock. Other companies do not have this luxury of finance access. It is excellent for business expansion as well as for preventing a company from going bankrupt when necessary.

Tax Benefits

Despite the fact that some corporations (C companies) are vulnerable to double taxation, other corporate structures (S corporations), depending on how their income is allocated, may offer tax advantages. S firms, for instance, have the luxury of dividing their income between the company and shareholders so that it can be taxed at various rates. The remainder of the business dividends will be subject to its own level of taxation, while any income identified as owner remuneration will be subject to self-employment tax.

Business Security and Perpetuity

When transferring ownership and sustaining a business over the long term, corporations, whose ownership is based on a proportion of stock ownership, give significantly more flexibility than other organizations.

Ownership of this company form is frequently simple to acquire and sell, while specifics surrounding the transfer of ownership rely on the governing agreement in the bylaws and articles of incorporation. For instance, an owner can sell off their entire stock if they desire to leave a business. Similar to this, a deceased owner’s stock ownership can readily pass to a new owner.

Disadvantages

There are also a number of disadvantages that come with forming a corporation. These include:

Double Taxation

The business income of the majority of corporations such as C-corps is taxed twice: once at the entity level and once at the shareholder level. This is based on their percentage of profits earned. Operating as an S corporation is the only way to get around this. By simply taxing each shareholder on their individual income and not at the entity level, S-corps solve this issue. However, if S-corps’ records don’t comply with the law, the IRS has been known to pay closer attention to them and even tax them as C-corps.

The Expense

The creation and maintenance of corporations are costly. Although creating and sustaining a corporation might be expensive, it may be simple for established firms to generate funds by selling shares. A lot of beginning capital will probably be required to get a corporation up and running, in addition to paying the filing fees, continuing fees, and higher taxes. 

Lengthy Application Process

The process of incorporating can be lengthy overall. However, filing your articles of incorporation with your secretary of state can be rapid. To accurately ascertain and record the specifics of the company and its ownership, you may need to comb through a lot of documentation. 

Rigid Formalities, Protocols, and Structure

The time and effort required to properly operate a corporation and follow legal regulations is in addition to the drawn-out application process. To keep your corporate status, you must adhere to a lot of procedures and strict rules. Additionally, there are limitations on specific corporation types. For instance, S-corps are limited to 100 stockholders, all of whom must be citizens of the United States.

Example of a Corporation

Corporations make up the majority of significant companies, like Toyota Motor Corp., Coca-Cola Co., and Apple. Some businesses operate both under their own names and under different trade names, such as Alphabet Inc., which is best known for operating as Google.

Summary

There are various types of corporations, each legal entity with a unique operating structure and set of responsibilities. The main difference between these different types is how they handle their earnings and taxes. As you advance in your career as an employee, the type of company you work for may have a little effect on your employment.