Corporation

A corporation is a legal entity organized under the laws of a particular state (or, outside the United States, under a comparable national or regional company law), legally separate and distinct from the individuals who own it. Ownership of a corporation is represented by shares of common stock, and sometimes also preferred stock, which can generally be bought, sold, and transferred without directly affecting the corporation's own continued legal existence.

Because a corporation is legally separate from its owners, the stockholders' personal assets are generally shielded from the corporation's debts and legal liabilities — a protection known as limited liability, and one of the main reasons businesses choose to incorporate rather than operate as a sole proprietorship or general partnership. A corporation also has what is sometimes called perpetual existence, meaning it continues on regardless of changes in its ownership, unlike a sole proprietorship, which legally ends when its owner dies or sells the business.

A corporation comes into existence when its founders file articles of incorporation with the relevant state authority, after which the corporation is run under a governance structure in which stockholders elect a board of directors, who in turn appoint corporate officers such as the chief executive officer to manage day-to-day operations. This layered structure of ownership, board oversight, and executive management is one of the clearest practical differences between a corporation and simpler business forms, where the owner typically manages the business directly.

A corporation's equity section is organized differently from a sole proprietorship's or partnership's, using accounts such as common stock, paid-in capital, and retained earnings rather than a single owner's capital account. Corporations, specifically those organized as regular C corporations, are also subject to corporate income tax on their own profits, and shareholders are separately taxed again on any dividends they receive, a structure often described as double taxation, which some smaller, closely held corporations avoid by electing S corporation status for tax purposes while remaining corporations under state law.

A closely-held corporation has a small number of shareholders and its stock is not traded on any public exchange, while a publicly traded corporation has sold shares to the general investing public, which are then bought and sold on a stock exchange and subject to significantly more extensive disclosure and reporting requirements, including filing audited financial statements with securities regulators such as the Securities and Exchange Commission in the United States. The accounting and reporting obligations facing a small, closely held corporation and a large publicly traded one can differ enormously, even though both share the same basic legal structure and the same fundamental equity accounting described above.

Unlike a sole proprietorship, which simply ends when its owner stops operating it, a corporation continues to exist as a legal entity until it is formally dissolved through a filing with the state, merged into another corporation, or acquired, regardless of how many times its individual shares of stock change hands along the way. This formal, state-level process for both creating and ending a corporation’s legal existence is part of what makes a corporation’s continuity independent of any single owner, officer, or director, in sharp contrast to simpler business structures whose legal life is tied directly to the people running them.