A corporation is a business entity which has a separate legal identity from its owners. As a separate legal entity, a corporation has many of the rights and responsibilities of an individual.
Corporations have two important features which help attract capital. First, corporations offer their owners financial liability limited to the owners’ original investment. Second, corporate equity ownership is transferable.
The equity units of a corporation are called stock shares. The owners of the corporation are called stockholders. Some corporations elect to list their shares on a public stock exchange, in which case investors can easily purchase or sell shares in the underlying corporation.
The two key documents corporations are the articles of incorporation and the bylaws. The articles of incorporation create the corporation and are filed with the state in which the corporation resides. The bylaws are the internal rules which govern the corporation.
States require corporate owners to elect a board of directors who oversees the corporation’s management (who the board elects). Publicly traded companies face additional rules regarding boards from the SEC and the exchange where the shares are listed.
There are two types of corporations: C-corporations and S-corporations. C-corporations are subject to “double-taxation” – the corporation must pay taxes on earnings at the corporate level and shareholders must pay taxes on dividends received. S-corporations do not pay taxes at the corporate level. Rather, S-corporations “pass-through” their income to shareholders who then pay taxes on their allocated earnings. Because the IRS places restrictions on the number and type of S-corporation shareholders, S-corporations are limited to smaller businesses.
