Corporation

Definition

A corporation is a legal entity that is separate from its owners, created under state law to conduct business. It can enter into contracts, own property, and be liable for debts, which means the owners' personal assets are protected from business liabilities. Corporations can raise capital through the sale of stock and are structured to allow for ownership to be transferred without disrupting the business operations.

5 Must Know Facts For Your Next Test

1. Corporations are considered 'persons' under the law, meaning they can sue or be sued, and they have the right to enter into contracts.
2. The formation of a corporation requires filing articles of incorporation with the state, which outlines the corporation's purpose and structure.
3. Ownership in a corporation is represented by shares of stock, which can be publicly traded or privately held.
4. Corporations are subject to double taxation: once at the corporate level on profits and again at the individual level when dividends are paid to shareholders.
5. The governance of a corporation typically involves a board of directors, who are elected by shareholders to oversee major decisions and protect their interests.

Review Questions

• How does the concept of limited liability benefit shareholders in a corporation?
  • Limited liability protects shareholders from being personally responsible for the corporation's debts and obligations. This means if the corporation faces financial troubles or lawsuits, shareholders only lose their investment in shares and their personal assets remain safe. This feature encourages investment since individuals can participate in business ventures without risking their entire financial wellbeing.
• Discuss the implications of double taxation for corporations and their shareholders.
  • Double taxation occurs when a corporation's profits are taxed at the corporate level and then again when those profits are distributed as dividends to shareholders. This can affect shareholder returns and corporate decisions regarding profit distribution. Many corporations may choose to reinvest profits back into the business instead of paying dividends, influencing their growth strategy and capital allocation.
• Evaluate how corporate governance structures impact decision-making within a corporation.
  • Corporate governance structures, such as boards of directors and management teams, play a crucial role in decision-making processes. A well-functioning board represents shareholder interests and ensures accountability within management. The dynamics between these groups can influence strategic directions, risk management practices, and overall company performance. Effective governance helps align the interests of shareholders with corporate objectives, ultimately affecting long-term sustainability and success.

Related terms

Shareholder: An individual or institution that owns shares in a corporation, holding an ownership interest and having rights to vote on important matters.

Limited Liability: A legal structure where a corporation's owners (shareholders) are only liable for the debts and obligations of the corporation up to the amount they invested.

Dividends: Payments made by a corporation to its shareholders from its profits, usually distributed on a regular basis.