Legal Definitions - corporation

A corporation is a distinct legal entity, separate from its owners, created under state law. It is treated by the law as an artificial "person" with many of the same rights and responsibilities as an individual. This means a corporation can enter into contracts, own property, borrow money, sue others, and be sued itself.

A key advantage of forming a corporation is limited personal liability. This protects the personal assets of the shareholders (owners) from the corporation's debts or legal obligations. Generally, a shareholder's financial risk is limited to the amount they invested in the company. Corporations also offer the benefit of perpetual existence, meaning the company can continue to operate even if its owners or managers change, and ownership can be easily transferred through the sale of stock.

To establish a corporation, founders typically file "articles of incorporation" with the state, outlining its basic structure and purpose. While state laws primarily govern corporations, federal laws also apply, especially for larger corporations that offer stock to the public, requiring them to disclose financial information to regulatory bodies like the Securities and Exchange Commission (SEC).

A common drawback of traditional corporations (often called C-corporations) is "double taxation." This occurs because the corporation's profits are taxed at the corporate level, and then any profits distributed to shareholders as dividends are taxed again at the individual shareholder level.

• Example 1: A Local Bakery Chain
  "Sweet Treats Inc." is a corporation that owns several popular bakeries across a city. One of its delivery vans is involved in an accident, causing significant damage and injuries to another vehicle. Because Sweet Treats Inc. is a corporation, the personal assets of its owners (shareholders) are generally protected. If the corporation is sued and found liable for damages exceeding its insurance coverage, the shareholders would typically only lose their investment in Sweet Treats Inc., not their personal homes or savings. This illustrates the concept of limited personal liability. Furthermore, if one of the original founders decides to retire, their shares can be sold to a new investor, and Sweet Treats Inc. continues to operate without interruption, demonstrating its perpetual existence.
• Example 2: A Major Smartphone Manufacturer
  "GlobalTech Corp." is a multinational corporation that designs and sells smartphones worldwide. Its shares are traded on major stock exchanges, allowing millions of investors to buy and sell ownership stakes daily. As a publicly traded corporation, GlobalTech Corp. is subject to federal regulations, including those enforced by the Securities and Exchange Commission (SEC). It must regularly file detailed financial reports and other disclosures to ensure transparency for its investors. This highlights how corporations, especially those offering stock to the public, operate under both state and federal oversight, and how ownership is readily transferable.
• Example 3: A Commercial Real Estate Developer
  "Urban Renewal Developers Inc." is a corporation focused on buying undeveloped land, constructing office buildings, and then leasing those properties to businesses. Urban Renewal Developers Inc. can sign contracts in its own name to purchase land, hire construction firms, and enter into lease agreements with tenants. If a tenant fails to pay rent, Urban Renewal Developers Inc. can initiate a lawsuit against them. Conversely, if a construction project goes awry due to the corporation's negligence, the corporation itself, not its individual founders, would be the party sued. This demonstrates the corporation's ability to act as a distinct legal "person" that can enter into agreements and engage in legal actions independently.