What is a Corporation?
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UPDATED: Feb 7, 2020
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A corporation is an organized body, generally formed to operate a business that has been authorized by the state in which it does business to be considered as a separate legal entity. These entities have their own rights, privileges, and liabilities distinct from those of the individuals within the entity, including its own debts and taxes. A corporation can enter into a contract, sue or be sued, and acquire assets in its own name. Corporations issue shares of stock in the company to individuals, supplying ownership capital and issue bonds to individuals lending money to (or investing) in the business.
Types of Corporations
Several types of corporations exist, such as C corporations and S corporations. C corporation is the term used to explain the way in which this type of corporation will be taxed by the IRS. A C corporation must pay corporate income tax on profits. If a dividend is paid to the stockholders from the corporation’s retained earnings, the dividend must be included on the stockholders personal tax return. As a result, the profits of a C corporation are subject to possible double taxation. Whereas the IRS does not require that an S corporation pay corporate income taxes on profits. The annual profit of an S corporation is included on the personal return of each stockholder.
A standard corporation has the goal of making money and will use a business format to achieve that go.
A charitable corporation exists for the purpose of helping others, not making a profit and is referred to as a not-for-profit corporation. While the employees of a not-for-profit corporation will still have a salary, it is considerably lower than that of a for-profit corporation and is scrupulously watched by the IRS.??
Of the different organization types, the corporation is a coveted organization for business entities for several reasons. Corporations have the increased capability of raising capital and they are easier to valuate than other entities. The value of a corporation is based on the business, not the owners. Most large firms, especially those engaged in manufacturing, are organized as corporations.??
Some of the world’s largest corporations include Apple, BP, China National Petroleum, Exxon Mobile, Hewlett-Packard, Japan Post Holdings, Oracle, Microsoft, Royal Dutch Shell, Sinopec, Toyota Motor, and Wal-Mart stores.
The Life Cycle of a Corporation
Corporations typically begin as privately held corporations. As a privately held corporation, the only people who are allowed to invest in the company are immediate family and friends of the founder. As a corporation grows and succeeds, it gains a board of directors to assist in running the business. In a privately held corporation, the board is typically comprised of the same family and friends who gave the company its start-up money. As the corporation continues to grow, it will eventually reach a point where it must go public. When a corporation goes public, it provides the public with an opportunity to invest in the company and receive returns from their investment in the form of dividends. The board of directors of a public corporation is held to strict standards of conduct and liability that dictate how the company is run. Because of this, the board typically switches over to specialists once a corporation goes public.
What Is a Merger?
A merger is when one corporation buys out another corporation, usually its competitor. While for some companies, this is the goal; for others it can be very discouraging. If you are starting a corporation and desire to prevent other companies from ever taking over your business, consult with a business attorney who can help you safeguard your business through properly drafted corporate by-laws.