What is a Corporation?

A corporation is a legal entity whose investors purchase shares of stock as evidence of their ownership interest in it. This entity acts as a legal shield for its owners, which means that they are generally not liable for the corporation's actions, though they can benefit from dividend payments and any appreciation in the value of their shares.

A corporation has most of the rights and obligations of an individual, such as being able to enter into contracts, hire employees, own assets, incur obligations, and pay taxes. It is organized under state law. The interests of shareholders are represented by a board of directors, which they elect.

Corporation Ownership

The base level of ownership in a corporation is common stock. The firm’s board of directors may also elect to issue preferred stock, which may give additional rights to shareholders, such as the ability to convert their shares into the issuer’s common stock. Preferred stock is more commonly issued by privately-held corporations, which need to dangle additional benefits in front of investors to convince they to buy shares. Publicly-held companies usually only need to sell common stock, which is sufficiently attractive to investors as long as the shares can be readily traded on an active stock exchange.