In legal terms, a Corporation is a legal entity (i.e., not a person) that often has similar rights in law to those of a person. In colloquial usage, "Corporation" usually refers to a business or commercial entity set up in accordance with a governmental framework.
A Corporation enjoys many of the rights and obligations of individual citizens, such as the ability to own property, sign binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a Corporation cannot vote.) To become a legal entity, a corporation must go through a process called incorporation
Two of the most distinct distinct features of incorporation include:
- Limited Liability: Unlike in a partnership, shareholders of a Corporation hold no liability for the corporation's debts and obligations. As a result their "limited" potential losses cannot exceed the amount which they paid for the stock. Not only does this allow Corporation to engage in risky enterprises, but limited liability also forms the basis for trading in corporate stock.
- Perpetual Lifetime: The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, officers or directors.
Ownership and control
Typically, a board of directors governs a corporation on the stockholders' behalf. The board has a fiduciary duty to look after the interests of the Corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers are chosen by the board to manage the affairs of the corporation.
Corporation can also be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a control interest analogous to that of a shareholder, including one or more seats on the board of directors. Creditors are not said to "own" the corporation as shareholders do, but can outweigh the shareholders in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit.
Historically, corporations were created by special charter of state governments. Today, corporations are usually registered with a state, and become regulated by the laws enacted by that state. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must designate the principal address of the corporation (where to contact it in the event of legal process), and often an agent or other legal representative of the corporation.
Generally, a Corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation's directors meet to create bylaws that govern the internal functions of the Corporation, such as meeting procedures and officer positions.
The law of the state in which a Corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.
Types of corporations
The institution most often referenced when the word "corporation" is used is a public or publicly traded corporation, the shares of which are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public. Most of the largest businesses in the world are publicly traded corporations.
The majority of corporations, especially those considered to be small businesses, are said to be closely held or privately held, meaning they are owned and managed by a small group of businesspeople or companies who do not buy and sell the company's shares daily in a stock market.
The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is that publicly traded corporations have an additional burden of complying with securities laws, which (especially in the U.S.) grant further rights to shareholders to protect them from fraud or unfairness in connection with the sale and purchase of stock. The publicly traded corporation must usually follow much more stringent disclosure requirements, and sometimes additional procedural obligations in connection with major transactions (e.g. mergers) or events (e.g. elections of directors).
In the United States, business corporations owe taxes according to two basic categories. A "C corporation" must pay corporate taxes, while "S corporations" pay no corporate taxes but instead pass profits and losses directly to their owners (the shareholders) who declare such profits and losses as part of their personal taxable income.
An S corporation must generally have no more than 100 stockholders, who must be natural persons (not other corporations or entities), must reside in the United States, and must consent to the classification; moreover, the S corporation can only issue a single class of stock. As a result of these restrictions, all publicly traded corporations and many larger close corporations have C corporation status. Certain kinds of investment companies are also exempt from corporate income taxes, provided they distribute almost all of their income to shareholders in the form of dividends or capital gains distributions.
Other commercial entities
Several other forms of business entities exist under the laws of various countries. These include:
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Limited liability company (LLC)
- Sole proprietorship