What is a corporation? The Free Dictionary (Farlex, Inc., 2012) defines a corporation as "a body that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members."
A corporation is separate from its owners, meaning that the owners are not held responsible for the corporation's actions. A shareholder’s liability is limited to his or her investment in the company's stock. A corporation's creditors cannot hold its owners personally responsible for the business's debts. Separation is one of the major advantages of this business form.
The corporation is formed under the laws of the state in which it is incorporated. The corporation must submit documents indicating its purpose, corporate structure, officers, and ownership intentions. These documents are known as the articles of incorporation. Adding to its complexity, a corporation must abide by numerous regulations. The corporation receives a charter, indicating its corporate governance, and is required to create a set of bylaws that state the rules and procedures it will follow.
The corporation is allowed to function as its own being. It can enter into contractual relationships, conduct business, purchase and sell goods and services, and hire and fire employees. It can also borrow and lend, as well as sue and be sued. A corporation is required to pay taxes on its profits. It exists!
There are a number of advantages and disadvantages associated with the corporate form of business. The table below outlines some of the major ones.
|
Advantages |
Disadvantages |
|---|---|
|
The liability of the owners (stockholders) is limited to the amount they have invested in the company. |
There is a separation between ownership (shareholders) and management of the corporation, which could cause significant issues. |
|
A corporation has a continuous existence. Death of the owners has no effect on the existence of the corporation. |
Corporate earnings may be subject to double taxation. Corporate net income is taxed, and dividends paid to stockholders are taxable individually when received. |
|
Transfer of ownership shares is easier than in other forms of business (sole proprietorship, partnership, etc.). Ownership is transferred with the sale of stock. |
There are extensive and expensive government regulations. |
|
Additional capital can be raised through the sale of shares of stock. |
The cost to start a corporation is higher than other forms of business. |
|
There is no mutual agency. This means that stockholders cannot act as agents of the corporation and bind the corporation to a contract. |
-
|
|
Stockholders have the right to receive a proportionate share of any assets that remain in the case of a liquidation after all debt is paid. |
-
|
If a company wants to become publicly traded, it must be incorporated and adhere to Securities and Exchange Commission (SEC) regulations. In a publicly traded corporation, stock is made available to the general public. The stock of publicly traded companies can be purchased by anyone who has the cash to do so. Shares of stock in publicly traded companies are available on at least one of the stock exchanges. The two largest stock exchanges are the New York Stock Exchange and NASDAQ. Publicly traded corporations are subject to SEC regulations and to rules that protect investors: they must report their financial statements, which must be audited by certified public accountants (CPAs) to ensure that the corporation is truthfully reporting its economic position.
In a privately held corporation, stock is held by a small number of shareholders. A privately held corporation’s stock is not made available to the general public. When shares of stock in a privately held company are traded, they are done so privately. Privately held corporations make up the vast majority of corporations that exist.