Corporations

KEY TAKEAWAYS

• A corporation (sometimes called a regular or C-corporation) is a legal entity that's separate from the parties who own it.
• Corporations are owned by shareholders who invest money in them by buying shares of stock.
• They elect a board of directors that's legally responsible for governing the corporation.

• A corporation has several advantages over a sole proprietorship and partnership:

  • An important advantage of incorporation is limited liability: Owners are not responsible for the obligations of the corporation and can lose no more than the amount that they have personally invested in the company.
  • Incorporation also makes it easier to access financing.
  • Because the corporation is a separate legal entity, it exists beyond the lives of its owners.
  • Corporations are generally able to attract skilled and talented employees.

• A corporation has several disadvantages over a sole proprietorship and partnership:

  • The goals of corporate managers, who don't necessarily own stock, and shareholders, who don't necessarily work for the company, can differ.
  • It's costly to set up and subject to burdensome regulations and government oversight.
  • It's subject to "double taxation." Corporations are taxed on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends.