What is a corporation?

Learn the definition of corporation and how this business structure works, as well as the benefits and responsibilities of corporations and their owners.

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ARTICLE SUMMARY

A corporation is a legal entity established under the laws of a state and recognized as a person separate from its owners.

This means that a corporation itself can, with the power to conduct business, enter into contracts, own its own assets, incur its own liabilities, and pay taxes, all separate from its owners. Corporations provide strong protection against liability for their owners, who are called shareholders.

Key features of a corporation

Separate legal entity: A corporation is its own legal "person." It can own property, sign contracts, take out loans, and even be sued—just like a real person.
Protection against liability: Shareholders' personal assets are generally protected from the corporation's debts and liabilities, so their financial risk is limited to the amount invested in their shares.
Ownership through shares: Corporations are owned by shareholders, who buy shares (portions of ownership) in the company. This makes it easy to transfer ownership by selling shares.
Perpetual existence: Unlike a sole proprietorship, single-member limited liability company or partnership, a corporation can continue to exist beyond the lives of its founders or shareholders.
Board of directors: The board of directors oversees the corporation's strategic direction, ensuring its long-term success, and safeguarding the interests of its shareholders.
Choice of tax treatment: Some corporations are taxed twice—once on company profits and again when shareholders receive dividends. Others, like S-corporations, have special tax benefits.

Types of corporations

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	C-corporation	S-corporation
Key differences	Pays income taxes on its profits, allows unlimited shareholders, can raise money by selling stock	No tax at the corporate level, limited to 100 shareholders, avoids double taxation
Best for	Large businesses seeking investors	Small to medium-sized businesses

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	Key differences	Best for
C-corporation	Pays income taxes on its profits, allows unlimited shareholders, can raise money by selling stock	Large businesses seeking investors
S-corporation	No tax at the corporate level, limited to 100 shareholders, avoids double taxation	Small to medium-sized businesses

How does a corporation work?

A corporation is a structure of business that is separate from its owners. It follows a structured system to operate smoothly, stay compliant with the law, and support growth. Here’s how it works:

Formation: To start a corporation, you must file Articles of Incorporation with your state. This document includes the company’s name, purpose, ownership details, and other important information. Once approved, the corporation becomes a separate legal entity.
Ownership through shares: Corporations are owned by shareholders, who buy shares in the company. These shares can be sold or transferred, making it easy to change ownership without disrupting the business.
Management structure: Corporations are organized into three main groups: shareholders, who own the company; the board of directors, who make the bigger decisions; and officers, who handle day-to-day operations.
Taxation: Corporations are taxed differently depending on their type. C-corporations pay taxes twice—once on company profits and again on shareholder dividends (known as double taxation). In contrast, S-corporations avoid double taxation by passing profits directly to shareholders, who then report them on their personal tax returns.
Rules and requirements: Corporations must follow law requirements, such as holding annual meetings, keeping financial records, and filing reports with the state. These requirements help keep the business legal and accountable.

Pros and cons of a corporation

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ADVANTAGES OF A CORPORATION	DISADVANTAGES OF A CORPORATION
• Limited liability protection. • Corporations can sell stock to raise capital, making it easier to grow and expand compared to other business types. • Has perpetual existence even if ownership changes. • Ownership can be transferred easily.	• More paperwork and regulations. • May be subject to double taxation. • Can be expensive to maintain. • Requires more formalities and record-keeping than other entities.

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ADVANTAGES OF A CORPORATION	• Limited liability protection. • Corporations can sell stock to raise capital, making it easier to grow and expand compared to other business types. • Has perpetual existence even if ownership changes. • Ownership can be transferred easily.
DISADVANTAGES OF A CORPORATION	• More paperwork and regulations. • May be subject to double taxation. • Can be expensive to maintain. • Requires more formalities and record-keeping than other entities.

Is a corporation right for you?

Choosing the right business structure is a critical decision. A corporation offers many benefits, but it also requires the added responsibility and burden of complying with organizational rules, industry standards, and governance requirements imposed by government authorities. To decide if a corporation is the right choice for your business, consider your long-term goals, the level of protection you need, how the organizer intends to raise capital for the company, and how you plan to handle taxes.

A corporation is a great option for business owners who want strong legal protection against liability, the ability to raise capital, and perpetual existence. However, it also requires daily paperwork and careful tax planning. For example, a small business with low risk and one owner may find a sole proprietorship a better fit.

If you’re still unsure about which structure is right for your business, feel free to reach out to one of our attorneys for help.

KEY TAKEAWAYS

A corporation is a legal entity separate from its owners. It can own property, sign contracts, and be responsible for debts without affecting the owner’s personal assets.
As a separate legal entity, it shields its shareholders from its separate liabilities, so they only risk losing the money they invested and are not personally responsible for corporate debts or other liabilities.
Corporations are owned through shares, making it easy to transfer ownership through buying or selling stock. This also allows businesses to raise capital by attracting investors.
Corporations have perpetual existence and continue operating even if original shareholders leave or pass away, unlike sole proprietorships or partnerships.
There are different types of corporations, such as C-corporations (which pay corporate taxes and can have unlimited shareholders) and S-corporations (which avoid double taxation but have limits on shareholders).

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