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.

Characteristics of a Corporation

The key characteristics of a corporation are as follows:

Separate legal entity. A corporation is treated as a separate entity under the law, meaning it can own assets, enter into contracts, sue or be sued, and conduct business in its own name.
Limited liability. Shareholders are only liable for the amount they have invested in the corporation. Their personal assets are protected from the corporation’s debts and liabilities.
Perpetual existence. A corporation continues to exist even if ownership changes, such as when shareholders sell their shares or pass away.
Ownership through shares. Ownership is divided into shares of stock, which can be freely bought, sold, or transferred. Shareholders are the owners of the corporation and may receive dividends as a return on their investment.
Centralized management. A corporation is managed by a board of directors, elected by the shareholders, which oversees the company’s major decisions and policies. Day-to-day operations are handled by officers and executives appointed by the board.
Double taxation. For C corporations, profits are taxed at the corporate level, and dividends paid to shareholders are taxed again at the individual level. Some corporations (e.g., S Corporations in the U.S.) can avoid double taxation by passing income directly to shareholders.
Regulatory oversight. Corporations are subject to extensive regulations, including filing annual reports, holding shareholder meetings, and adhering to securities laws.

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.