What is a Corporation?

Brendan McGuigan

In a general sense, a corporation is a business entity that is given many of the same legal rights as an actual person. Corporations may be made up of a single person or a group of people, known as sole corporations or aggregate corporations, respectively.

Corporate stock certificates.
Corporate stock certificates.

Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade.

A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.

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A corporation may issue stock, either private or public, or may be classified as a non-stock corporation. If stock is issued, the corporation will usually be governed by its shareholders, either directly or indirectly. The most common model is a board of directors which makes all major decisions for the corporation, in theory serving the best interests of the individual shareholders.

In the United States there are three major types of corporations: Close, C, and S.

Close corporations issue stock, but the amount of shareholders is greatly limited, usually to less than thirty. Given the small number of shareholders, normally all are involved in board-level decision making. Transfer and sale of stock is also tightly controlled.

C corporations are the most common type of corporation in the United States. They allow for theoretically unlimited amounts of stock to be issued, and usually have a smaller board of directors which make decisions. C corporations pay taxes both at the corporate level, and at the personal level, as shareholders pay taxes on their dividends.

S corporations are virtually identical to C corporations, save that they have a special tax status with the IRS. Instead of paying taxes at both levels, S corporations are required only to tax their dividends--the corporation itself does not need to pay taxes.

While many people in the United States choose to incorporate in their own state--small businesses especially--some states have corporate charters that are particularly beneficial to certain types of business. Nevada, for example, does not require ownership records that attach names, making it ideal for corporations interested in protecting the private identities of their owners.

A number of books and websites have sprung up in recent years to aid small businesses to incorporate. There are two major benefits for most small businesses. The first is the substantial legal and fiscal protection in the event of litigation or bankruptcy. The second is a potentially uninterrupted, essentially infinite lifespan for the business. This is contrasted with a sole proprietorship, which may experience problems and complications should the owner die, while a corporation allows for the seamless passing on of the business.

Different states have different fees for incorporation, but most are extremely affordable. For anything more complicated than a simple sole proprietorship incorporation, an attorney is a necessity; and even for the most basic corporate structure, legal counsel is recommended.

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Discussion Comments

ktmac

What is the benefit of a family ranching business to incorporate?

anon947565

Is it ethical or legal to transfer a potential asset of the corporation to a new company owned by an officer or stockholder of the original corporation?

anon215465

I want to start a small business like a manufacturing business, so I want to purchase two acres of land and start a business. I have one house in my district.

anon172830

what is much better when forming a business, is it partnership or corporation? and who is the president if the person applied is a foreigner?

anon65342

Corporate business are subject to pay tax even if they shift to shareholders. Why do corporations pay tax?

- anon56131: You have some very good information here that would be helpful in explaining these things to students in career courses.

- anon38954: If a corporation has a sole owner and he dies, who owns the corporation? There are no shareholders.

- lrestaurant: If a company that has been functioning as an individual, decides to incorporate mid-year, are they issued a 1099 for the amount of money they were paid for the whole calendar year, the portion of the year that they were not incorporated or none at all since at the end of the year they were incorporated?

- anon26231: Human Resource is the main part of any industry.

- anon25912: How does a corporation raise money?

- anon23047: What is an example a business would need to keep the identity of its owners private?

There are designations for corporations like "limited liability". How would these fit into the Close/C/S categorization scheme?

anon56131

Corporate business are subject to pay tax even if they shift to shareholders. Why do corporations pay tax?

anon38954

You have some very good information here that would be helpful in explaining these things to students in career courses.

lrestaurant

If a corporation has a sole owner and he dies, who owns the corporation? There are no shareholders.

anon26231

If a company that has been functioning as an individual, decides to incorporate mid-year, are they issued a 1099 for the amount of money they were paid for the whole calendar year, the portion of the year that they were not incorporated or none at all since at the end of the year they were incorporated?

anon25912

Human Resource is the main part of any industry.

anon23047

How does a corporation raise money?

kirinqueen

What is an example a business would need to keep the identity of its owners private?

There are designations for corporations like "limited liability". How would these fit into the Close/C/S categorization scheme?

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