Legal Definitions - corporations

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, and be sued, all in its own name.

One of the primary advantages of forming a corporation is limited personal liability. This protects the personal assets of the owners (shareholders) from the corporation's debts and legal obligations. Generally, a shareholder's financial risk is limited to the amount they invested in the company. Corporations also offer perpetual existence, meaning the company can continue to operate indefinitely, even if its owners or managers change. Ownership is typically divided into shares of stock, which can be easily bought and sold, allowing for straightforward transfer of ownership.

Corporations are primarily governed by the laws of the state where they are formed, which typically require filing specific documents like "articles of incorporation." For corporations that offer their stock to the public, federal laws and regulations, such as those enforced by the Securities and Exchange Commission (SEC), also apply. While offering significant benefits, traditional corporations (often called C-corporations) face a potential drawback known as "double taxation," where the corporation's profits are taxed, and then the shareholders' dividends from those profits are taxed again at the individual level. In rare cases of severe misconduct or fraud, a court might "pierce the corporate veil," holding individual shareholders personally responsible for corporate debts, but this is an exception to the general rule of limited liability.

• Example 1: Limited Liability for a Software Startup

  Scenario: Sarah and Tom decide to launch a new mobile app development company. They incorporate their business, "Innovate Apps Inc.," in Delaware. After a few years, a user sues Innovate Apps Inc., claiming their app caused significant data loss.

  Illustration: Because Sarah and Tom incorporated their business, their personal assets—like their homes, savings accounts, and personal investments—are generally protected from the lawsuit. The lawsuit targets Innovate Apps Inc. as a separate legal entity. If the company loses the lawsuit and cannot pay the judgment, Sarah and Tom's personal liability is typically limited to the amount they invested in Innovate Apps Inc. This demonstrates the crucial benefit of limited personal liability that incorporation provides.

• Example 2: Perpetual Existence and Transferable Ownership for a Family Business

  Scenario: "Evergreen Manufacturing Co." was founded by the Miller family over 70 years ago and has grown into a large corporation. The original founders have long since passed away, and ownership has been passed down through generations and sold to various investors over time.

  Illustration: Evergreen Manufacturing Co. continues to operate successfully today, despite the passing of its original founders and numerous changes in ownership. This highlights the concept of perpetual existence, where the corporation's life is not tied to the lifespan of any individual owner. The ability for shares to be bought, sold, or inherited without dissolving the company also illustrates the ease of transferable ownership, a key characteristic of corporations.

• Example 3: Separate Legal Identity for a Retail Chain

  Scenario: "Global Groceries Corp." is a large supermarket chain that owns hundreds of stores across several states. The corporation enters into lease agreements for its store locations, signs contracts with suppliers for produce and goods, and takes out loans from banks to fund expansion, all under the name "Global Groceries Corp."

  Illustration: This scenario shows that Global Groceries Corp. acts as a distinct legal "person." It can independently enter into legally binding agreements (leases, supplier contracts) and incur debt (bank loans) in its own name, separate from its individual shareholders or executives. If a supplier has a dispute, they sue "Global Groceries Corp.," not the individual people who own or manage it, demonstrating its separate legal identity.