An organization formed with governmental approval to act as an artificial person to carry on business (or other activities), which can sue or be sued and (unless it is non-profit) can issue shares of stock to raise funds with which to start a business or increase its capital.
CHARACTERISTICS OF A CORPORATION
A corporation is a legal entity, meaning it is a separate entity from its owners who are called stockholders. A corporation is treated as a “person” with most of the rights and obligations of a real person. A corporation is not allowed to hold public office or vote, but it does pay income taxes. It may be established as a profit making or nonprofit organization and may be publicly or privately held. The stock of a public company is traded on a stock exchange. There may be thousands, even millions, of stockholders in a public company. Stock of a privately held company is not traded on an exchange and there are usually only a small number of stockholders
Ownership in a corporation is represented by stock certificates, which is why the owners are called stockholders. Stockholders have the right to: vote for the members of the Board of Directors and any other items requiring stockholders action; receive dividends when authorized by the Board of Directors; have first right of refusal when additional shares are issued, thereby allowing the stockholder to maintain the same ownership percentage of the company before and after the new shares are issued (called a pre‐emptive right); and share in assets up to their investment, if the company is liquidated. In some states, stockholders are called shareholders.
A number of characteristics distinguish a corporation from a sole proprietor or partnership.
Unlimited life
As a corporation is owned by stockholders and managed by employees, the sale of stock, death of a stockholder, or inability of an employee to function does not impact the continuous life of the corporation. Its charter may limit the corporation’s life although the corporation may continue if the charter is extended.
Limited liability
The liability of stockholders is limited to the amount each has invested in the corporation. Personal assets of stockholders are not available to creditors or lenders seeking payment of amounts owed by the corporation. Creditors are limited to corporate assets for satisfaction of their claims.
Separate legal entity
The corporation is considered a separate legal entity, conducting business in its own name. Therefore, corporations may own property, enter into binding contracts, borrow money, sue and be sued, and pay taxes. Stockholders are agents for the corporation only if they are also employees or designated as agents.
Relative ease of transferring ownership rights
A person who buys stock in a corporation is called a stockholder and receives a stock certificate indicating the number of shares of the company she/he has purchased. Particularly in a public company, the stock can be easily transferred in part or total at the discretion of the stockholder. The stockholder wishing to transfer (sell) stock does not require the approval of the other stockholders to sell the stock. Similarly, a person or an entity wishing to purchase stock in a corporation does not require the approval of the corporation or its existing stockholders before purchasing the stock. Once a public corporation sells its initial offering of stock, it is not part of any subsequent transfers except as a record keeper of share ownership. Privately held companies may have some restrictions on the transfer of stock.
Professional management
Investors in a corporation need not actively manage the business, as most corporations hire professional managers to operate the business. The investors vote on the Board of Directors who are responsible for hiring management.
Ease of capital acquisition
A corporation can obtain capital by selling stock or bonds. This gives a corporation a larger pool of resources because it is not limited to the resources of a small number of individuals. The limited liability and ease of transferring ownership rights makes it easier for a corporation to acquire capital by selling stock, and the size of the corporation allows it to issue bonds based on its name.
Government regulations
The sale of stock results in government regulation to protect stockholders, the owners of the corporation. State laws usually include the requirements for issuing stock and distributions to stockholders. The federal securities laws also govern the sale of stock. Publicly held companies with stock traded on exchanges are required to file their financial statements and additional informative disclosures with the Securities and Exchange Commission. Certain industries, such as banks, financial institutions, and gaming, are also subject to regulations from other governmental agencies.
Corporations are two-level structures. They feature a passive ownership level (the shareholders) and an active management level (the officers and directors). Shareholders are passive and protected by law from personal liability for the debts and actions of the C Corporation. They are liable only to the extent of their investment. In other words, you can only lose the amount you pay in for your shares.
Directors are elected by the shareholders and are responsible for both electing and directing the officers, who carry out the day to day business of the corporation. Although powerful, directors are not permitted to involve themselves in active operations. For example, directors are not authorized to sign agreements and bind the corporation.
The officers are the people you most associate with corporations – i.e., the President, Vice-Presidents, CEOs, Treasurers, etc. Officers are the ones who carry out the daily business of the corporation. These are the people who will sign checks, enter into agreements, etc.
Officers and directors do not have to be shareholders of a corporation, although in many cases they are. Because there are no minimum numbers of owners, single-person corporations, where one person holds all of the offices, is a director and is also a shareholder is common. There is no requirement that everyone hold a position in a corporation. You could have a two-owner corporation where one owner is simply a shareholder and the other owner holds all the officer and director positions.