What Is A Corporation?
There are a number of steps required in starting a business. One is picking one of the many forms of business entities available. In this article, we take answer the question what is a corporation?
The corporation is the third oldest form of business we have. The first is the sole proprietor, which is just a single person starting to sell something. The second is a partnership where two people just sell something. The corporation is the third form of business, but the first real business entity that provides benefits to the owners that do not otherwise exist.
The corporate entity comes to use from Europe where it has been used for centuries. The corporation is unique in that it may be owned by many people, but provides asset protection to all of them. This occurs because of what I like to call a legal fiction. The laws and courts have dictated that a corporate entity is an independent person for legal purposes and has all the rights of an individual. This was reflected in the Supreme Court decision that stated campaign contributions by corporations could not be limited because it was a bar on that “persons” right to freedom of speech.
Practically speaking, this means the corporation creates a shield of asset protection between its owners, known as shareholders, and the debt and liabilities of the business. Let's say you and I start a corporation. We each kick in $5,000 to get it up and running. The business starts well, but then fails. The business gets sued for past due bills and is found liable. You and I cannot be held personally liable for the debts, but we do lose our $5,000 contributions.
For this liability protection to remain, the corporation must be run correctly. This is typically known as the corporate formalities. The entity must have officers elected to run it. This includes the Chief Executive Officer, Chief Financial Office, Secretary and others can be added. It must also have an overseeing Board of Directors to guide the overall direction of the entity. In most states, the same person can serve many or all of these positions.
There are definite advantages and disadvantages to corporations that require more detail. We'll be adding articles detailing these and here are the most recent additions: