A corporation is a legal entity, set up under the guidelines of state law, which essentially stands in the place of its owners, who are known as shareholders. The corporation is customarily invested with powers to act as a person, to enter into contracts, to incur debt, to obtain and sell property, and to engage in a wide range of other activities.
A corporation must be set up in accordance with the business laws of a particular state. Generally, this requires the filing of articles of incorporation, as well as by-laws and other documents. Corporations generally issue certificates of stock, which identify ownership within the corporation. Most states require that corporations file certain annual reports, that any actions of a corporation be done by either corporate resolution or by vote of the shareholders, and that corporations conduct shareholder meetings on a specified basis.
A corporation may be public or private. A public corporation is one whose stock is available for purchase by the public, customarily through an exchange (the New York Stock Exchange, for example). A private corporation, on the other hand, is one where ownership (shares) is not publicly traded.
The principal benefit of the corporate form is the limitation of liability. As a general rule, a shareholder in a corporation will only be liable for the value of his or her investment. If a company fails, or if there is litigation against a company, the most the shareholders can potentially lose is the amount they paid to purchase the stock.
With certain types of corporations, you can also avoid a business tax, instead paying income tax on distributions as part of your personal tax filing.
Corporations may be designated as:
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