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A corporation is a legal entity (distinct from a natural person) which often has similar rights in law to those of a artificial person. (Critics view this "corporate personhood" as a fundamental flaw in the nature of corporations.) Civil law systems may refer to corporations as "moral persons"; they may also go by the name "SA"
(anonymous society) or something similar, depending on language (see below).
In modern practice, many people use the word "corporation" narrowly to refer to a commercial entity set up in accordance with a governmental framework. However, churches, interest-groups (both can
form as not-for-profit corporations or can
exist as voluntary associations), cities and townships (often chartered as
public corporations), among others, may also have historically
lengthy corporate identities.
General
Legal status
Within the official framework, a corporation or in some jurisdictions a company, is a legal,
artificial entity with or without shareholders, who may be humans, trusts or other corporations. When no stockholders exist, a corporation may be a "non-stock
corporation", a "membership corporation", or similar — this second type of corporation counts as a not-for-profit corporation. In either category, the
corporation comprises a collective of individuals with a distinct legal
status and with special privileges not vouchsafed to ordinary unincorporated businesses, to voluntary associations or to groups of individuals. Corporations receive a charter from a
state, and become regulated by the laws enacted by that state. The law of the state in
which a corporation operates (if different from the state in which it was formed) will generally regulate its activities.
Certain jurisdictions do not allow the use of the word company alone to denote corporate status, since the
word "company" may refer to a partnership or to a sole proprietorship. Some
of the designations used to signify corporation status that one can only adopt with state sanction include:
- Limited (Ltd.)
- Unlimited
- Incorporated (Inc.)
- Corporation (Corp.)
- Public limited company (plc or PLC) (notably in the
United Kingdom)
- Publicly Listed Company (Plc.)
- Proprietary (Pty) (notably in Australia)
- S.A. (Société anonyme - French: "anonymous society")
- GmbH (Gesellschaft mit beschränkter Haftung - German: "society with limited responsibility")
- S.p.A. ("Società per Azioni" - Italian: "Shares-based Society")
- S.A.p.A. ("Società in Accomandita per Azioni")
Some jurisdictions require that one of a list of terms or abbreviations appear in the corporate name. Generally speaking, any
corporation, whether domestically created or foreign (from another jurisdiction) must register in order to conduct business in
that jurisdiction. As part of this registration, it must designate the principal addresss of the corporation, i.e. where to
contact it in the event of legal process.
The law typically views a corporation as a fictional person, a legal person or a moral person (as
opposed to a natural person); United States law recognises this as
corporate personhood. Under such a doctrine, obviously a
legal fiction, a corporation enjoys many (or all) of the rights and obligations of individual citizens, such as the ability to own property, sign binding contracts , pay taxes, have constitutional rights and otherwise participate in society.
Typically a board of directors governs a corporation; that
board has a fiduciary duty to look after the interests of the
corporation. The corporate officers -- such as the CEO, president, treasurer and other titled officers -- manage the affairs of the corporation.
Benefits of forming a corporation
The most salient features of incorporation include:
- (1) Limited Liability. Unlike in a partnership, stockholders of a corporation hold no liability for the corporation's debts
and obligations. As a result their "limited" potential losses cannot exceed the amount which they paid for the stock. Not only
does this allow businesses to engage in risky enterprises, but limited liability also forms
the basis for trading in corporate stock. Without the limitation on the amount that an investor can lose, the time and effort
required to determine whether the stock could wipe the investor out would render the stock market very illiquid (as one can
observe in the very illiquid market for partnership interests).
- (2) Perpetual Lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders,
officers or directors. This allows for stability of capital, which thus becomes
available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to
dissolution and distribution. This feature also had great importance in the Medieval period, when land donated to the Church (a corporation) would not generate the feudal fees that a lord
could claim upon a landholder's death. In this regard, see Statute of Mortmain.
Origins
Early corporations of the commercial sort, such as the Dutch East India Company formed under frameworks (set up by governments of states) to undertake tasks which appeared too risky or too expensive for individuals or the
governments to embark upon.
Kenneth Pomeranz, an
economic historian, argues that the need to perform pseudo-governmental operations (such as the waging of war) accounts for the development of this economic structure in Europe
but not in China or in the Middle
East.
Non-profit organizations
In modern economic systems, the corporate form of governance commonly appears in a wide variety of business and non-profit activities. Though the laws governing these
creatures of statute often differ, the courts often interpret provisions of the law
that apply to profit-making enterprises in the same manner, or in a similar manner, when applying principles to non-profit
organizations as the underlying structures between these two types of entity are often very similar.
National features
United States
In the United States several corporate forms exist; the name of
"corporation" generally applies to a businesses, run for profit, to which one of
the States of the United States has granted a
corporate charter. The federal government
of the United States usually does not grant corporate charters to businesses (exceptions include public corporations such as
the Post Office and Amtrak).
American corporations typically charter as a Delaware
Corporation in Delaware, which charges no tax on activities outside the state
and has courts experienced in commercial law. Corporations set up for
privacy or asset protection often charter in Nevada, which allows setting them up with no record of who owns them.
Historically, most U.S. states issued charters for fixed lengths of time (for example, a manufacturing corporation might
receive a charter good for forty years), and only by an act of the legislature. In theory, a limited charter forced corporations
to remain accountable to government (i.e. to the community) for the special privileges granted to them. Investors protested that
it actually led to unhealthy amounts of political payoffs and graft. Most states now charter unlimited-term corporations
for a small fee, and possibly a yearly tax.
Canada
In Canada both the federal government and the provinces have
corporate statutes, and thus a corporation may have a provincial or a federal charter. Many older corporations in Canada stem
from Acts of Parliament passed before the introduction of general
corporation law.
Related topics: Preferred stock, Corporate governance, Bylaws, Delaware corporation, Commercial law,
Stock certificates
Corporate taxation
In the United States
In the United States business corporations owe taxes according to several different categories. The United States Internal Revenue Service classifies organizations as
associations (taxable as corporations), partnerships (not limited to common-law partnerships) or trusts ("ordinary trusts"). [see
26 CFR §§301.7701-2 through 301.7701-4]
The taxation system recognises two types of corporations for taxation purposes:
C-Corp - The most common
form of corporation, the C-corporation has few ownership restrictions and must pay corporate taxes; all
publicly-traded corporations have C-corporation status. C-corporations pay income taxes just as an individual does, and
C-corporations do not receive a deduction on dividends they pay to stockholders. This leads to the so-called "double-taxation" of
corporate profits: a given profit becomes subject to income tax twice, once at the corporate level, as an item of income, and
once at the stockholder level, as a dividend.
S-Corp - Commonly used by
small business proprietors, the S-corporation pays no corporate taxes, but instead passes
profits and losses directly to its owners (the stockholders) who declare such profits and losses as part of their personal
income taxes). In this manner S-coporations resemble partnerships, although
some subtle differences in taxation exist. As a result, S-corporations do not become subject to the "double-taxation" that
C-corporations enjoy. However, not all corporations qualify for S-corporation treatment. An S-corporation must generally have no
more than 75 stockholders, all of them natural persons (not other
corporations or entities) residing in the United States; and the S-corporation can only issue a single class of stock.
Other related types of business entities
Partnerships and limited liability partnerships
A partnership comprises a contractual agreement between individuals and/or corporations which share profits and losses. It resembles a
sole proprietorship, but it has more than one member, each
called a "partner". A partnership does not constitute a separate entity and the partners all retain liability for the debts of
each partner (if contracted to on behalf of the partnership). Usually a partnership will not survive the death of one of the
partners (though it may undergo reorganization at that time).
A partnership can have general partners and limited partners (also known as "silent partners"). General partners retain
liability for all of the debts and obligations of the partnership. Limited partners, on the other hand, retain liability only for
the amounts they have specifically agreed to contribute to the partnership pursuant to the partnership agreement.
A limited liability partnership (LLP) comprises a partnership composed entirely of limited partners without
any general partner. For historical reasons most U.S. jurisdictions restrict limited liability partnership to associations of
professionals such as lawyers and doctors. However, this restriction has
become fairly meaningless, since a limited liability company can achieve the same legal result.
Limited liability company
The limited liability company
(LLC) resembles a partnership in that it provides a very flexible structure. A limited liability company has
members, rather than partners, and is governed by an operating agreement, rather than a partnership agreement. Otherwise very
much resembles a partnership in that the members can contractually arrange in the operating agreement for the management and
economic provisions that they wish.
Many lawyers and businesspersons prefer the limited liability company form
of taxation because of its extreme flexibility and favorable tax treatment.
Business trusts
One other type of business entity can exist: the business trust, most often used as a vehicle for investment purposes. Only a few jurisdictions allow
for the creation of business trusts, most notably Massachusetts; many mutual
funds function as Massachusetts business trusts. In many jurisdictions the business trust has become popular as a vehicle for
investing in real estate: becoming known as real estate investment trusts or REITs (pronounced
reets).
Taxation of non-corporate entities
Since 1996, United States partnerships and limited liability companies have had the
right to elect whether government will treat them as corporations or as "flow-through" entities under the IRS' check-the-box regulations (see form 8832).
The income tax assessment process does not treat a flow-through entity as a person for income tax purposes; instead it divides
its income and loss (and every other tax attribute) among its partners, who report them to the IRS. Some limits exist on an
entity's ability to elect flow-through treatment: most importantly, a publicly-traded company cannot elect flow-through
treatment; as a practical matter this means that publicly traded corporations remain subject to a more stringent tax régime than
do closely held companies.
See also
Quotes
- You never expected justice from a corporation did you? They have neither a soul to lose nor a body to kick. ----
Lord Thurlow
- The opinion of the Court, after mature deliberation, is that this [a corporate charter] is a contract, the
obligation of which cannot be impaired without violating the Constitution of the United States. -- Chief Justice John Marshall, Dartmouth College v. Woodward (1819).
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