What Is an Individual Entity?
An individual entity is a business type that's treated as a separate legal entity. This usually refers to corporations.3 min read
An individual entity is a business type that's treated as a separate legal entity. This usually refers to corporations.
How Are Corporations Individual Entities?
In the United States, a corporation may be defined as a legal entity that, according to state law, is able to engage in activity, as well as claim legal name as restricted by the corporate charter.
From a legal standpoint, corporations possess certain rights and responsibilities. They also carry the liabilities of other individual entities. For tax purposes, the IRS qualifies a domestic corporation as a "United States person." Similarly, foreign corporations are treated as "foreign persons."
Some companies are automatically considered corporations. Others must select the option as a tax classification.
Back in 1819, the U.S. Supreme Court held that a corporation possesses many of the same rights as individual citizens. Corporations can do the following:
- Enter into contracts
- Enforce contracts
- File lawsuits
- Be sued
- Own assets
- Pay taxes
A corporation's rights are constitutionally protected.
Individuals who wish to form a corporation must file formation documents with the state in which they want to incorporate. The documents are the Articles of Incorporation. When people form a corporation, they realize the following two major advantages:
- They're able to issue stock through the corporation.
- They're shielded from personal liability.
A person who wants to be part-owner of a corporation only has to buy some of the issued shares of stock.
If the corporation is legally liable for damages, reparations are limited to the corporation's assets. The corporate officers and shareholders are protected from legal action. The only way this protection is lifted is if they commit fraud.
Corporations: Pros and Cons
A corporation is a separate, individual entity. It operates under state law, and its charter restricts its scope of activity and name. Corporations are legal entities. Shareholders own them and directors manage them. They're operated by officers.
As long as legal formalities are followed, corporate owners aren't personally responsible for business debts or liabilities. A corporation's shares of stock may be freely bought and sold. This is subject to applicable securities laws and regulations.
Several kinds of corporations exist, such as the following:
- C corporations
- S corporations
- Professional corporations (P.C.)
- Close corporations
- Professional Associations (P.A.)
C corporations are subject to double taxation: the corporation itself is taxed on its profits, and the shareholders pay taxes on dividends.
Corporations have the following advantages:
- Stockholders' limited liability: A stockholder's liability is limited to whatever he or she invested in the business. Creditors can't seize stockholders' personal assets to satisfy business debts unless there's a personal guarantee in place.
- Perpetual life: Shares in the business can be passed on to heirs if a shareholder dies. Even when shareholders leave the business, it continues on as a legal entity.
- Ease of transferring ownership: Stockholders are able to sell shares when they want, as long as there is a market.
- Ease of expansion: There's a greater capacity to raise capital by selling stock.
Corporations have the following disadvantages:
- Government regulation: The corporation must follow all state and recordkeeping regulations.
- Higher cost: It costs more to form a corporation, compared to other business types.
- State restrictions: A corporate charter restricts business operation to the state where it's issued unless owners get permission from other states.
- Double taxation: This won't apply to corporations that elect S corp status, but it does apply to C corps.
Are Corporations Treated as People?
Corporations don't have all of the same rights as an individual person. For instance, they can't do the following:
- Collect Social Security
- Declare children as tax deductions
Corporate personhood has two main features: property ownership and contracts.
Corporations can own trademarks, land, buildings, and other types of private property. They're able to enter into legally binding contracts and into disputes as either a defendant or plaintiff.
Corporate officers and shareholders can't personally file suit if the corporation is wronged in some way. Likewise, no outside party can sue individual officers or stockholders for damage that the corporation commits.
In the technical sense, a corporation isn't an actual person, but legally, the business enjoys some individual rights. The personal liability protection that corporate owners enjoy is often a big factor in choosing this business structure.
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