Understanding the Definition of Corporation
We often hear the word corporation as the legal ending of a business name? But what does it mean for a business to take the structure of a corporation? Find out from our guide the distinguishing characteristics of a corporation from other business structures, and the advantages of adopting such business format.
A corporation is a legal entity or structure vested with rights, responsibilities and standing by the laws of a certain state where it is incorporated.
Its incorporation provides it with a legal personality not granted to similarly owned, but unincorporated organizations. As such it is assigned a social security number or federal tax ID number and allowed to enter into contracts, own properties, file a lawsuit, convicted of offenses, and pay taxes like a real person. It can be owned by a single individual, a group of individuals or other legal entities like trusts and other corporations.
Defining Features of a Corporation
A corporation has four defining characteristics that differentiate it from other business structures. It provides limited liability to its owner or owners, a feature not found in proprietorships and general partnerships. Its lifespan – unlike that of a limited liability company – is limitless. It is further defined by a centralized management and the capacity of its owners to feely transfer interests to others.
Limited Liability: Unlike proprietorship and partnership, a corporation is recognized as a separate and distinct entity from its owners. Its legal and financial obligations are of its own and are not the same with that of its owners. The owners are exposed to financial risks to the corporation only to the extent of their investment. In case a corporation goes bankrupt, creditors can only call on the company’s assets and not that of its owners. If it is sued, the suit is against the organization or the office of those responsible for it and not against the owner.
Indefinite Life: As a corporation is considered independent of its owners, its life does not depend on the ownership of a particular business entity or individual. Its owners could change as often as it wants, but the business continues until all of them agree to dissolve the company or merge it with another. Due to its unlimited lifespan, it is able to accumulate capital through the years to be used for future investments.
Transferability of Interest: A for-profit corporation is owned by people who have bought shares or interest in the company. Shareholders can sell their ownership or interest in it by selling their stocks. If there are no stockholders, the organization is a non-stock corporation, which may or may not operate for profit.
Centralized Management: A corporation usually has a board of directors elected by shareholders. The board makes important decisions for the company, hires officers, and sets company policies.
One of the best advantages of a corporation structure is it allows the owners to easily raise money by selling shares. Also, in the U.S., corporations are taxed less than individuals. And they are allowed to carry unlimited amount of losses to subsequent tax years. Visit www.irs.gov for more C topics from the IRS.
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