Key Takeaways

  • A stock corporation is a for-profit entity that issues stock to shareholders in exchange for capital.
  • Shareholders receive dividends and voting rights but do not manage daily operations.
  • Stock corporations can be structured as C corporations or S corporations.
  • Key benefits include limited liability, perpetual existence, and access to capital.
  • Disadvantages include double taxation and strict formalities.
  • They are ideal for companies planning to raise significant capital or go public.
  • Shareholders, directors, and officers each play unique roles in corporate governance.

A stock corporation is owned by a group of shareholders. These corporations are for-profit entities, and ownership of the corporation is granted by providing shares of stock.

What is a Stock Corporation?

With a stock corporation, shareholders will contribute capital to the company. In exchange, the shareholders are given shares in the company that represent their capital contribution. Shares in stock corporations are typically provided in the form of a certificate, which makes it much easier to determine ownership of the corporation. Like any form of property, these shares can be transferred very easily, although there may be certain restrictions.

Stock shares serve a variety of purposes, some for the company and some for its owners:

  • When stock shares are purchased, the money received for the shares helps to finance the company.
  • The person who owns stock shares will have a say in company decisions, including the ability to cast votes at annual meetings.
  • Ownership of stock shares also provides the right to receive dividends.

Basically, a trade-off occurs when shares of stock are sold. By selling stock to raise money, the corporation's board of directors gives up some of their decision-making power. Not all corporations offer stock shares. Non-profit corporations, for instance, use memberships instead of shares of stock.

The main benefit of purchasing shares in a stock corporation is being able to receive dividends, which can result in an impressive return on investment. Shares are also important because they grant owners a say in a company's directors, as well as the ability to vote on corporate policy.

A stockholder will have a controlling interest in a corporation if they own 50 percent plus one of the voting shares in the corporation. Essentially, the shareholder with controlling interests owns more voting shares than the rest of the owners, meaning they have the power to make all decisions for the corporation. Most corporations are structured as a C corporation.

Common Uses of Stock Corporations

Stock corporations are often used by:

  • Startups seeking venture capital funding.
  • Established businesses aiming to expand through public investment.
  • Companies planning mergers and acquisitions.
  • Businesses in industries with high capital demands, such as tech or manufacturing.

Their ability to issue stock makes them attractive to investors, and the limited liability shields personal assets of shareholders from corporate debts.

Types of Stock Corporations

Stock corporations are generally categorized into two main types: C corporations and S corporations.

  • C Corporation (C Corp): This is the default structure for a stock corporation. C corps are separate legal entities from their owners and are subject to corporate income tax. They can have unlimited shareholders and issue multiple classes of stock.
  • S Corporation (S Corp): This type allows profits and losses to pass through directly to shareholders’ personal tax returns, avoiding double taxation. However, S corps have restrictions such as a 100-shareholder limit and the requirement to be U.S. citizens or residents.

Understanding the distinction between these types is crucial when deciding which stock corporation structure best aligns with your business goals.

Benefits of a Stock Corporation

Stock corporations are legal entities. They are considered separate from their owners and have the ability to issue unlimited shares. Stock corporations can last as long as the owners wish.

Stock corporations are the most popular type of business entity for several reasons:

  • They allow owners to raise capital by selling stock.
  • They can do business on a global scale.
  • They have the ability to acquire other businesses for the purpose of expansion.
  • They can become publicly traded at a later date if they wish.

Stock corporations are also a good choice for companies that want to pursue venture capital funding.  Because corporations are separate from their owners, the company is liable for all its actions.

Shareholders of the corporation will receive limited liability protections as long as certain corporate formalities are met, such as:

  • Regularly holding corporate meetings.
  • Documenting the minutes of meetings to keep track of decisions.
  • Using a corporate bank account to transact business.
  • Filing tax returns appropriately.
  • Complying with statutory requirements at the state level.

The personal assets of owners are not subject to the corporation's liabilities. The liability of shareholders is limited to what they have invested in the company. When a corporation fails to meet these requirements for corporate formality, the corporate veil can be pierced, meaning the IRS can hold corporate officers, shareholders, and directors personally liable.

The biggest disadvantage of forming a stock corporation is that these entities face double taxation. First, the corporation is taxed on any profits that it earns. Second, if the shareholders receive dividends, this money must be reported and taxed as income. Fortunately, with the right planning, corporations should be able to avoid double taxation.

Typically, stock corporations are comprised of three factions, including:

  • Directors.
  • Officers.
  • Shareholders.

Every group in a corporation has its own duties and rights.

Formation Requirements for Stock Corporations

Forming a stock corporation typically involves the following steps:

  1. Choose a Corporate Name: Must comply with state naming requirements and be distinguishable from existing businesses.
  2. File Articles of Incorporation: This legal document includes details such as the corporation’s name, registered agent, number of authorized shares, and purpose.
  3. Appoint Initial Directors: These individuals oversee the organization until the first shareholder meeting.
  4. Create Corporate Bylaws: These govern internal operations, including shareholder meetings and voting procedures.
  5. Issue Stock Certificates: Shares must be formally issued and recorded in the corporation’s stock ledger.
  6. Obtain Licenses and Permits: Depending on your business and location, local, state, or federal permits may be required.

Each state may have its own variations of these steps, so compliance with local regulations is essential.

Shareholders Rights and Responsibilities

While shareholders are the owners of corporations, they are not responsible for managing the corporation on a day-to-day basis. Instead, shareholders will vote in a Board of Directors who will be tasked with running the company.

Shareholders have several rights exclusive to their position, such as:

  • The ability to elect directors and also remove directors.
  • Make amendments to the corporation's bylaws and Articles of Incorporation.
  • Approval of selling corporate assets.
  • Approval of reorganizations and corporate mergers.

Corporate Governance Structure

A stock corporation's management is divided into three core groups:

  • Shareholders: Owners of the company who vote on major corporate matters.
  • Directors: Elected by shareholders to oversee strategic direction and appoint officers.
  • Officers: Appointed by directors to manage day-to-day operations (e.g., CEO, CFO, Secretary).

This division of power ensures checks and balances within the corporation and aligns stakeholder interests.

Taxation of Stock Corporations

Stock corporations face different tax treatments depending on their classification:

  • C Corporations: Subject to double taxation—once at the corporate level and again when dividends are distributed to shareholders.
  • S Corporations: Avoid double taxation by passing income, losses, deductions, and credits directly to shareholders.

Despite the double taxation of C corps, many businesses choose this structure for its flexibility in ownership and ability to reinvest earnings back into the business without distributing dividends.

Frequently Asked Questions

  1. What is a stock corporation?
    A stock corporation is a for-profit business entity that raises capital by issuing shares of stock to shareholders.
  2. How is a stock corporation different from an LLC?
    Unlike LLCs, stock corporations issue shares, have more complex formalities, and are more attractive to investors due to their scalability and structure.
  3. Are stock corporations only for large companies?
    No. While many large companies are stock corporations, small businesses can also benefit from this structure, especially if they plan to seek investment.
  4. What are the disadvantages of a stock corporation?
    Disadvantages include double taxation (for C corps), strict regulatory compliance, and more administrative formalities compared to other entity types.
  5. Can a stock corporation convert to an S corporation later?
    Yes, a C corporation can elect S corporation status if it meets IRS requirements, including the number and type of shareholders.

If you need help understanding a stock corporation, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.