Corporation

A corporation is a legal entity created to conduct business that is separate from its owners. It can own assets, enter contracts, borrow money, hire employees, sue and be sued, and file tax returns. Corporations provide limited liability protection: shareholders generally are not personally responsible for the company’s debts or legal obligations.

Key takeaways

• A corporation is a distinct legal entity with many of the same rights and responsibilities as an individual.
• Owners hold shares of stock; shareholders profit from dividends and stock appreciation.
• Corporations must be formed under state law by filing articles of incorporation and complying with statutory requirements.
• Limited liability generally protects shareholders, directors, and officers from personal exposure except in cases of extreme misconduct.

How a corporation works

• Ownership is divided into shares held by shareholders.
• Shareholders elect a board of directors to set policy and oversee management.
• The board hires executive management to run daily operations.
• Corporations can be private (few owners) or public (shares listed on exchanges and regulated by federal securities laws).
• Corporations may be for-profit or nonprofit depending on their purpose and tax treatment.

Forming a corporation: common steps

1. Choose a business name and verify availability.
2. Designate a registered agent with a physical address in the state of formation.
3. File articles of incorporation and pay the required state fees.
4. Adopt corporate bylaws that define governance rules and procedures.
5. Hold an organizational board meeting and issue stock to initial shareholders.
6. Obtain an Employer Identification Number (EIN) from the IRS.
7. Open bank accounts, obtain required licenses and permits, and comply with ongoing state filing requirements.

Specific requirements and fees vary by state.

Legal requirements and governance

• State law governs incorporation, issuance of stock, and ongoing compliance (annual reports, franchise taxes, etc.).
• Public companies are subject to additional federal disclosure and reporting obligations.
• Directors owe fiduciary duties (care and loyalty) to the corporation and can face liability for breaches.
• Corporations must maintain corporate formalities (minutes, records, separate finances) to preserve liability protection.

Advantages and disadvantages

Pros
* Limited liability protection for owners.
* Easier access to capital by selling shares.
* Perceived credibility and permanence.
* Employee benefits and equity compensation can be easier to offer.

Cons
* More complex and costly to form and maintain than sole proprietorships or partnerships.
* Greater administrative and regulatory requirements.
* Potential for double taxation of corporate profits (C corporation) unless structured or elected otherwise.

Liquidation

When a corporation ceases operations, it may be liquidated:
* A liquidator sells assets, pays creditors, and distributes any remaining funds to shareholders.
* Liquidation can be voluntary or involuntary (creditor-driven) and may lead to bankruptcy if liabilities exceed assets.

Corporation vs. LLC (brief)

• Both provide limited liability protection.
• An LLC is typically a pass-through entity for tax purposes (profits taxed to members) unless it elects corporate taxation.
• Corporations generally require a board, bylaws, and formal shareholder processes; LLCs offer more operational flexibility.
• Choice depends on factors such as tax planning, fundraising needs, governance preferences, and investor expectations.

Bottom line

A corporation creates a separate legal identity that limits owner liability and enables capital raising through stock. Forming and operating a corporation involves state filings, governance structures, and ongoing compliance. The corporation form suits businesses that need investment, scalability, and the formal governance required by investors and public markets.

FAQs

What protects shareholders from liability?
* Limited liability — shareholders are typically not personally responsible for corporate debts or lawsuits, except in cases of fraud or when corporate formalities are ignored.

How is a corporation different from a business?
* “Business” is a general term. A corporation is one legal form a business can take; operating as a corporation creates a separate legal entity distinct from its owners.

How do you form a corporation?
* File articles of incorporation in the chosen state, adopt bylaws, appoint a registered agent, issue stock, and obtain an EIN. Specific steps and costs vary by state.