Key Takeaways

  • A corporation is a separate legal entity that can own property, enter contracts, and continue indefinitely beyond the lives of its shareholders.
  • Major characteristics include limited liability, perpetual existence, transferable ownership, and centralized management by a board of directors.
  • Advantages include limited liability and easier access to capital; disadvantages include double taxation, strict compliance, and higher costs.
  • Types of corporations include C corporations, S corporations, B corporations, and nonprofit corporations, each with distinct rules and tax treatment.
  • Examples of corporations range from global giants like Apple and Microsoft to smaller professional corporations and local nonprofits.
  • Forming a corporation requires filing articles of incorporation, drafting bylaws, and complying with state laws and regulatory requirements.

What is an example of a corporation? Apple Inc., Walmart Inc., and Microsoft Corporation are all examples of corporations.

Basics of a Corporation

A corporation is a legal entity independent of its members. It holds authority and can incur liability on its own. A corporation conducts its business like an artificial person.

Traditional corporations are often known as C corporations. The letter "C" refers to Section C of the Internal Revenue Code (IRS) under which corporations file their corporate taxes. By default, the IRS treats a corporation as a C-corp unless it is registered as some other type of corporation.

Types of Corporations

While “corporation” is often used broadly, there are several distinct types:

  • C Corporation (C-Corp): The default corporate form, subject to corporate income tax. Profits may be taxed twice (once at the corporate level and again when distributed as dividends).
  • S Corporation (S-Corp): Allows pass-through taxation to avoid double taxation but is limited to 100 U.S. shareholders.
  • B Corporation (Benefit Corporation): For-profit entities that also pursue social or environmental missions. Recognized in many states.
  • Nonprofit Corporation: Formed for charitable, educational, or religious purposes. Profits are reinvested in the mission, not distributed to shareholders.
  • Professional Corporation (PC): Restricted to licensed professionals such as doctors, lawyers, or accountants. Provides liability protection but may have unique tax rules.

These distinctions matter when choosing the right structure for liability protection, taxation, and governance.

Characteristics of a Corporation

Following are the major distinguishing characteristics of a corporation:

Ownership

Shareholders are the owners of a corporation.

Board of Directors

A corporation is managed by a board of directors, which is elected by the shareholders.

Perpetual Existence

A corporation continues to exist for an unlimited period of time. It remains unaffected by the retirement or death of its shareholders. A corporation terminates only if:

  • Its shareholders dissolve it, or
  • It becomes bankrupt.

Limited Liability

Shareholders of a corporation have limited liability. If the corporation becomes bankrupt, creditors cannot pursue personal assets of the shareholders. However, under certain circumstances like fraud and illegal activities, courts may lift the corporate veil and make the shareholders personally liable for the resulting debts and liabilities.

The limited liability feature has made corporations a popular form of business in the United States. If the corporation is unable to meet its debts and obligations, its shares tend to lose their value. However, shareholders cannot be forced to pay back the company debts.

Corporate Taxes

Corporations are liable to pay taxes on their income even if the income is distributed among shareholders as dividend. Since the distributed income is again taxed in the hands of the shareholders, this often results in double taxation.

Distinct Legal Entity

Corporations are distinct legal entities that exist independent of their shareholders. They can own assets, enter into contracts, borrow money, sue others, and can be sued in their own name.

Advantages of a Corporation

Corporations provide several benefits that make them attractive for business owners:

  • Limited Liability Protection: Shareholders are generally not personally responsible for business debts.
  • Capital Raising Ability: Corporations can issue stock to raise funds from investors.
  • Perpetual Existence: The entity continues regardless of ownership changes.
  • Transferable Ownership: Shares can be sold or transferred without disrupting business operations.
  • Credibility and Growth Potential: A corporate structure can enhance trust with banks, investors, and clients, supporting expansion.

Disadvantages of a Corporation

The corporate structure may not be suitable for all types of businesses. Forming and operating a corporation involves lots of formalities and paperwork. They are highly governed entities compared to other forms of businesses like partnerships and sole proprietorships. Corporations are also more expensive to operate.

Double taxation is a common complaint against corporations. Shareholders end up paying taxes twice on their business income: first in the hands of the corporation and then again in their individual capacity when they receive their business income as dividend.

Examples of Corporations in Practice

Corporations exist in nearly every sector of the economy, from technology to retail to healthcare. Some well-known examples include:

  • Apple Inc. – A multinational technology corporation known for iPhones and MacBooks.
  • Walmart Inc. – One of the world’s largest retail corporations.
  • Microsoft Corporation – A leading software and cloud computing corporation.
  • Google LLC (under Alphabet Inc.) – A technology giant structured as a C corporation.
  • American Red Cross – A nonprofit corporation dedicated to disaster relief and humanitarian services.
  • Smaller Professional Corporations – Medical practices, law firms, or accounting firms often incorporate as PCs for liability and tax advantages.

These examples highlight the flexibility of the corporate model, which can accommodate small professional groups or multinational enterprises.

What Is an S Corporation?

An eligible corporation can elect for special tax treatment under subchapter S of the IRS code. Making an S-corp election allows the corporation to pass through its profits and losses to its individual shareholders instead of paying income tax at the corporate level. Thus, an S-Corp election is effective in eliminating double taxation.

Advantages of an S corporation

  • Limited liability.
  • Pass-through taxation.
  • Attractive for investors.
  • Tax filing frequency of just once a year.

Disadvantages of an S corporation:

  • Ownership or membership is restricted to citizens and legal resident of the United States.
  • You cannot have more than 100 shareholders.
  • You must first go through the complete process and cost of incorporation before being able to make the S-corp election.
  • Failure to file mandatory returns and taxes may result in termination of your S-corp status.
  • S corporations are subject to closer IRS scrutiny.

How to Form a Corporation

  1. Determine the state for incorporation.
  2. Choose a business name.
  3. Appoint the initial directors.
  4. File the articles of incorporation with the concerned state agency (usually the secretary of state) and pay the applicable filing fee. Articles act as the corporate charter; they create a corporation.
  5. Draft the corporate bylaws for internal governance of the corporation.
  6. Conduct the first board meeting of directors.
  7. Obtain necessary licenses and permits applicable to your industry and place of business.

Compliance and Ongoing Requirements

Forming a corporation is only the first step. To stay in good standing, corporations must meet ongoing obligations, such as:

  • Annual Reports: Most states require filing yearly or biennial reports and paying associated fees.
  • Corporate Minutes: Boards of directors must record decisions from meetings.
  • Tax Filings: Federal, state, and sometimes local taxes must be filed and paid.
  • Regulatory Compliance: Industries like finance, healthcare, and energy face additional oversight.
  • Franchise Taxes: Many states impose annual franchise taxes for the privilege of doing business as a corporation.

Failure to comply with these requirements may result in fines, suspension, or loss of corporate status.

Frequently Asked Questions

  1. What is a corporation in simple terms?
    A corporation is a legally recognized entity separate from its owners, capable of owning property, signing contracts, and continuing indefinitely.
  2. What are the main types of corporations?
    The main types are C corporations, S corporations, B corporations, nonprofit corporations, and professional corporations.
  3. What are some famous examples of corporations?
    Examples include Apple, Microsoft, Walmart, and nonprofit entities like the American Red Cross.
  4. Why do businesses choose to incorporate?
    Most businesses incorporate to limit liability, raise capital through stock, and gain credibility with investors and customers.
  5. What are the ongoing requirements after forming a corporation?
    Corporations must file annual reports, pay franchise taxes, hold board meetings, and comply with federal and state regulations.

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