What is a Corporation?
A corporation is one of many ways to formally organize a business. Structuring a business as a corporation has a number of important legal requirements and consequences that impact investors.
How a Corporation Works
1. A corporation is owned by shareholders, and their ownership is represented by shares of stock.
2. A corporation has a board of directors, which is a group of people elected by the shareholders to oversee the corporation's management. The board of directors is elected to make decisions that are in the best interest of the shareholders.
3. A corporation has an unlimited life; that is, corporations don't die or expire unless a) the shareholders decide to intentionally dissolve the corporation or b) a corporation is unable to pay its debts and is forced into bankruptcy.
4. Shareholders have limited liability. That is, the liabilities of the corporation do not extend to the shareholders. If the corporation goes bankrupt or defaults on a loan, lenders cannot repossess shareholders' personal assets or try to force shareholders to repay the company's debts.
6. Corporations are legal entities that exist separate and apart from their shareholders. In fact, they are usually afforded the legal rights of an individual person. That is, they can own assets, borrowand sue or be sued.
Why Corporations Matter
It's important to understand the characteristics of corporations because if you havein the , you are a shareholder and part owner of the corporations whose you own.
Corporations are the most popular form of business structure in the U.S. because of the loans, your lose value (perhaps 100% of their value), but you as a shareholder are not responsible for paying back the debts. A shareholder cannot lose more than 100% of his or her investment.protection. If the corporation can't pay back its
If the corporation makes a profit, your in that company become more valuable because as a shareholder, you're entitled to your portion of the net income. In fact, one of the main goals of a corporation's employees is to maximize shareholder value; that is, to work on behalf of the owners in order to enrich them as much as possible.
The corporate structure is not appropriate for every business. Corporations are highly governed, regulated and taxed when compared to other business forms (sole proprietorships or partnerships). This makes them more expensive to operate and conduct business. One of the largest complaints about the corporate structure is that profits are taxed twice: the corporation must pay income and shareholders must pay income on that same income if they receive a payout ( ).