Corporate Definition,
Definition of Corporation
A corporation is a
legal entity granted authority by a federal, state or
provincial government to act as an individual, exercising the same rights
and subject to the same obligations as any
natural person. A corporation comprises a group
of shareholders (of a for-profit company) or members (of a non-profit
organization) whose identities remain distinctly separate from the
corporate identity with respect to legal and taxation issues. Since a
corporation is empowered with the same legal rights as those ascribed to
individuals, it has the ability to sue and to be sued, to own assets,
to hire and fire employees, and to borrow and loan money. Additionally,
a corporation has the right to issue stock and to exist in perpetuity.
A corporation has an assessed value or worth; this worth is
divided into units of ownership, called shares, which are then
distributed to corporate stockholders. Shares having different
attributes, such as voting rights or conversion rights, can be created,
depending upon how the corporation is initially structured or later
restructured. A publicly-traded company (not to be confused
with a public corporation) is a corporation under
which persons and organizations not associated with the corporation are
granted the right to purchase corporate stock.
A privately-held corporation can be transformed into a publicly-traded
company by issuing shares of stock for public consumption; this process
is known as going public. Conversely, the management of a
publicly-held corporation can take the company private by buying
back all the publicly-held shares of company stock. Finally, a
corporate takeover can be orchestrated when an individual or entity
buys up or otherwise gains control of enough voting shares of a
corporation to definitively influence the outcome of the company’s
decision-making process. A corporate takeover is considered
friendly (often referred to as a corporate merger when two
corporations are involved) if both parties agree to the action and
hostile if the management of the corporation resists the takeover.
In a hostile takeover, some or all of the corporation’s board of
directors are likely to be replaced.
Types and Characteristics of
Corporations
In the United States, corporate legal structures have evolved to fulfill a
variety of needs and interests. Paramount among the reasons behind
forming a corporation is the concept of limited risk. In most cases, the
risk to shareholders or members of a corporation is legally limited to the
assets shareholders have contributed to the corporation; personal
assets are immune from corporate debt obligations and legal attacks
directed against the corporation.
The method by which corporations are defined depends upon the perspective from
which the corporate structure is viewed. While the U.S. Internal Revenue
Service (IRS) is concerned with defining
corporations with respect to taxation, an investor
will be more interested in a corporation’s
status as privately held or publicly traded. The majority of business
persons who contemplate forming a corporation are primarily motivated to
do so by both risk abatement and tax reduction considerations.
Keeping in mind that corporations can be defined from multiple viewpoints, here
are definitions for some common types of corporations:
- C Corporation, also known as a General Corporation, is
the most common form of corporation. Attributes of a C Corporation
include:
- Directors and shareholders remain anonymous;
- There is no limit on the number of shareholders;
- Shareholders do not have to be U.S. citizens or residents;
- The corporation is treated as an independent legal entity;
- The possibility exists to raise capital by selling shares of the
corporation, which can be easily transferred;
- Profits and losses are taxed at the corporate level;
- Certain tax benefits may accrue to corporations that are not
available to other business entities or to individuals, such as
the ability to retain earnings for future activities or business
expansion and the ability to deduct fringe benefits such as
insurance, health plans and retirement plan deductions while
leaving these benefits tax-free to owner-employees.
- A Close Corporation possesses the attributes of a C Corporation
with the following exceptions:
- The number of corporate shareholders is limited to 30;
- Shares cannot be transferred without prior approval by the
corporate directors;
- Public trading of shares is prohibited.
- An S Corporation is a C Corporation which has applied to the IRS
for and subsequently been granted special tax status. This special tax
status enables corporate profit and loss to be reported on the personal
tax returns of the shareholders, which enables shareholders to deduct
losses that would be unreportable under a C Corporation and to avoid
double taxation of dividends. (Dividends are taxed as profits to a
C Corporation and as dividends to shareholders.) S Corporations are
subject to certain restrictions, which include but are not limited to
the following:
- The number of corporate shareholders is limited to 75;
- All shareholders must be U.S. citizens, residents of the U.S.,
estates or certain types of trusts;
- Only one class of stock may be issued;
- No more than 25 percent of gross corporate income may be derived
from passive income;
Corporate Legal Requirements
Because a corporation is a complex legal entity, it is more expensive and
more complicated to set up and operate than a sole proprietorship,
partnership or limited liability company. A corporate charter,
otherwise known as articles of incorporation, which describes the
purpose, place of business and other details of the pending corporation,
must be drawn up and filed, together with required fees, with the state or
province in which incorporation is to occur. (This is not necessarily the
state in which the business is physically located.)
While established under the auspices of states or provinces, corporations
are governed by rules and regulations of both state (provincial) and
federal governments, making them subject to greater legal formality
and attendant paperwork. Failure of a corporation to file required
paperwork, pay the necessary renewal fees or follow legal corporate
formalities may be grounds for a court to overturn the liability protection
afforded by the corporate structure and impose personal liability upon the
shareholders; such legal action is known as piercing the veil of
limited liability or piercing the corporate veil. Such action
is not arbitrary, but must be brought by an individual creditor who must
prove specific legal tenets.
Authored by Kenneth L. Anderson.
Original article published 30 October 2004.
Follow links to the right to learn more about websites and articles that can aid you in business incorporation or in
establishing your business as a limited liability company.
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