Corporation

Definition

A corporation is a legal entity that is separate from its owners, allowing it to own assets, incur liabilities, and enter into contracts in its own name. This separation provides limited liability to its shareholders, meaning they are typically not personally responsible for the debts and obligations of the corporation. Corporations can raise capital through the sale of shares and can continue to exist independently of their founders or owners.

5 Must Know Facts For Your Next Test

1. Corporations can be classified as public or private; public corporations sell shares to the public through stock exchanges, while private corporations do not.
2. The creation of a corporation typically requires filing articles of incorporation with the state and adhering to various regulatory requirements.
3. Corporations enjoy perpetual existence, meaning they continue to exist even if ownership changes through the transfer of shares.
4. The corporate structure allows for easier access to capital, as corporations can issue stocks and bonds to fund operations and expansion.
5. Corporations are subject to double taxation; they pay taxes on their profits, and shareholders also pay taxes on dividends received.

Review Questions

• How does the concept of limited liability benefit shareholders in a corporation?
  • Limited liability protects shareholders by ensuring that they are only financially responsible for the debts and obligations of the corporation up to the amount they invested. This means if the corporation faces financial difficulties or bankruptcy, shareholders' personal assets are not at risk. This protection encourages investment in corporations, as individuals can participate in business ventures without fear of losing everything they own.
• What are the key differences between public and private corporations, particularly in terms of ownership and regulatory requirements?
  • Public corporations are owned by numerous shareholders who can buy and sell shares on stock exchanges, which subject them to strict regulatory oversight by agencies like the SEC. In contrast, private corporations have a limited number of owners and do not sell shares publicly, leading to less regulatory scrutiny. The ownership structure affects how capital is raised and how decisions are made within each type of corporation.
• Evaluate the impact of corporate structure on capital raising and long-term business sustainability.
  • The corporate structure significantly enhances a company's ability to raise capital because corporations can issue stocks and bonds, attracting investment from both individual investors and institutional entities. This access to capital allows corporations to fund expansion, innovation, and other long-term projects without immediate repayment pressures. Moreover, the ability to exist perpetually ensures that businesses can outlast their founders or initial investors, fostering stability and sustainability in their operations over time.

Related terms

shareholder: An individual or entity that owns shares in a corporation, giving them a claim on part of the corporation's assets and earnings.

limited liability:

A legal structure that protects shareholders from being personally liable for the debts and liabilities of the corporation beyond their investment in shares.

board of directors:

A group of individuals elected by shareholders to oversee the management of the corporation and make key decisions regarding its operations and policies.