What Is a Corporation?

Kerie Kerstetter
16 min read
A corporation is an organization that is legally recognized as one single entity. It can be a collection of companies or individuals and can be operated either for-profit or not-for-profit. Generally speaking, business corporations will be run for profit whereas charitable corporations will be classed as not-for-profit.

By forming a corporation, shareholders position their business as a separate legal entity. This limits individual liability of the owners and allows corporations to conduct business as an entity in itself. Corporations can be formed by an individual or a group of shareholders, so can be achieved by all sizes of organization.

Corporations will gain the rights and responsibilities possessed by individuals, providing the ability to operate and improve the business. Countries across the world recognize corporations as an integral part of how companies form and continue to function. Corporations will be held to the relevant local or national corporate law, and in most cases pay income tax on corporate income.

This article explores the common types of corporations, the benefits they bring and how they function. It also explains the process for both incorporating and dissolving a corporation.

How Are Corporations Formed?

Corporations are formed through the process of incorporation. This will generally be through an individual or group of shareholders completing a digital registration with the relevant government body. In the USA it is the Office of the Secretary of State. Corporations will usually receive a certificate of incorporation once registration is complete.

The incorporation process is the filing of certain legal documents with the government. In the USA, this is done on a state-by-state basis. In many states, these documents are known as 'articles of incorporation' or 'certificate of incorporation'. Documents provide the name, purpose and location of the business, and also outline the type of stock or shares when relevant.

Corporations will be subject to the corporate laws of the state, which includes taxation rules and business regulations. For this reason, many corporations will choose states with favorable corporate laws or taxes in which to file incorporation.

In the UK, the concept and process of incorporation is similar. Organizations will register to become 'limited companies,' a different term for a corporation. Limited companies are their own legal entities and are registered online with Companies House by shareholders.

Countries across the world that recognize corporations will have a similar process for incorporation. The number of shareholders can vary, from a single owner of a company to numerous shareholders in a multinational corporation.

Requirements for Incorporation in the USA

In the USA the process of incorporation will vary between states but will usually consist of a company submitting articles of incorporation. These are legal documents filed with the relevant government body to create a corporation. In the USA, this is usually the Office of the Secretary of State. These legal documents will usually include:
  • The name and address of the corporation.
  • The purpose of the corporation.
  • The structure of the corporation, and its business type.
  • Contact details of its board of directors.
  • The number of authorized stocks and shares.
  • Details of the individual filing for incorporation, including a signature.

Incorporation in the UK

Organizations in the UK follow a similar incorporation process, in which a shareholder registers a business and receives a certificate of incorporation. Registration sets up a 'limited company,' which acts as its own legal entity. The business owner will submit an online form to Companies House to register the limited company.

The required information typically includes:
  • Name and official address of the company.
  • The appointed company director or board of directors.
  • Details of key shareholders and people with significant control of shares.
  • Key documents about how the company will be run.

Benefits of Incorporation

There are clear advantages for a business to become a corporation. A corporation is its own legal entity and thereby limits the individual liability of shareholders or owners. This helps to protect the personal assets of shareholders, keeping them apart from the corporation's liabilities.

Establishing a corporation as its own legal entity makes it more straightforward to sell the company to another individual or group. It also ensures the continuity of the company if it has new owners. In many states, corporations can also take advantage of more favorable tax rates in comparison to personal income tax.

Becoming a legally recognized corporation is an integral part of achieving growth within a business. Corporations can raise capital by selling stocks and shares, a clear avenue for investment in the organization. The benefits of corporations include:
  • Limit the personal liability of individual shareholders or the owner.
  • Encourage managed risk-taking to achieve better growth, by avoiding personal financial liability.
  • Makes selling or transferring ownership of the organization straightforward.
  • Potential for a lower corporate income tax rate.
  • Sell shares to generate capital to fund business improvements.
  • The corporation will continue to exist regardless of changes in owner or shareholders.

How Do Corporations Operate?

Once incorporated, the shareholder of a corporation will usually elect a board of directors to manage the corporation. The board can be seen as a governing body, which manages the day-to-date operations of the corporation.

There can be a number of different directors. The board usually reflects the size or complexity of the corporation. Directors manage the corporation on behalf of the shareholders, taking the decisions to achieve the business aims of the group. It's best practice for the board to represent both senior management and shareholders, with a mixture of members from both inside and outside the organization.

Directors from within the corporation typically include high-level executives, key stakeholders or main shareholders. These 'inside directors' will have an expert understanding of the day-to-day operations of the organization, and the overall corporate objectives.

Corporations can also include independent directors, who provide external expertise to the board. These board members may hold useful sector knowledge or expertise in business and risk management. In addition, independent directors can bring an objective view to solving problems or disputes.

How Are Corporations Closed?

Corporations can be ended or dissolved through the process of dissolution or liquidation. Whether voluntary or involuntary, liquidation sees the selling of assets and paying off creditors, with anything remaining going to shareholders.

Involuntary liquidation is usually triggered by the creditors of a corporation. This will usually happen in cases of bankruptcy when corporate assets are sold to pay off debts. Corporations can also be suspended if they have not paid the proper amount of corporation tax.

If a corporation naturally runs its course and its business aims are met, shareholders may look to 'wind up' the business. The corporation's existence as its own legal entity is ended, and its assets liquidated. In the USA, corporations will file dissolution documents with the relevant local government body. The rules and processes will differ between states, but the result is the corporation being withdrawn as a legally recognized entity.

What Is a C Corporation?

'C corporation' is usually the default classification for any for-profit corporation formed in the USA. The majority of corporations in America are classed as C corporations.

A C corporation is taxed as its own entity, which means the organization is subject to income taxation as a corporation. Once corporate tax has been paid on corporate earnings, shareholders can receive the remaining amounts through dividends. Dividend income is taxable income. This is in contrast to S corporations, in which shareholders are subject to income tax instead of the corporation as a whole.

C corporations are required to host one or more meetings between directors and shareholders each year. Minutes must be taken and recorded within these meetings, as well as records of any voting. All C corporations must have a board of directors, elected by the shareholders. The board can vary in size and manages the day-to-date operation of the corporation.

The Benefits of Becoming a C Corporation

C corporations are the most common type of corporation in the USA. Incorporation offers a range of benefits to businesses and organizations, from better tax rates to protection of personal assets.

The benefits of a C corporation include:
  • Protect the personal assets of shareholders and owners, by keeping liabilities within the corporation.
  • Access to more favorable corporate tax rates in certain states.
  • Unify the entire organization around a clear business aim.
  • Streamline the process of changing owners and management.
  • Offer shares and stocks to raise capital to fund the continued growth of the organization.

What Is an S Corporation?

Unlike C corporations, S corporations do not pay corporate income tax as an entity. Instead, the shareholders pay their own individual income tax. Any income, deductions, credits or losses are split between shareholder tax returns. An S corporation allows sole owners, small organizations or partnerships to benefit from incorporating their business.

C corporations are in effect taxed twice on income: once for overall income through corporate income tax, and the second time through personal income tax on dividends. In contrast, only personal income tax is paid on salaries or shareholder dividends in S corporations. This means S corporations can save money on corporate tax.

To become an S corporation, organizations must first complete the incorporation process to become a C corporation. At this point, the corporation can apply for S corporation status at the Internal Revenue Service. There are a few important requirements for an organization to be eligible as an S corporation, including a limit on the number of shareholders.

S Corporation Requirements

There are a few specific requirements for S corporations set by the Internal Revenue Service. These requirements need to be met by any organization wanting to achieve S corporation status. They are likely to be met by smaller companies and organizations. Organizations need to make sure they meet these requirements, as otherwise they will be classed as C corporations. S corporation requirements include:
  • The corporation must have fewer than 100 shareholders.
  • The shareholders need to be individuals, with some exemptions for particular not-for-profit trusts or estates.
  • S corporations must have only one class of share or stock.
  • The shareholder must either be citizens or residents of the USA.

The Benefits of S Corporations

S corporations offer the same opportunities for investment, the sale of shares and protection from liability as a C corporation. However, S corporations avoid double income taxation and are well suited for smaller businesses and companies.

The benefits of S corporations include:
  • Save on corporate taxes, as S corporations don't pay corporate income taxes as an entity. Organizations can avoid the double taxation of C corporations.
  • Attract investment and raise capital as a corporation through shares and stocks. This can help fund further business growth.
  • S corporations are a legally recognized entity, so limit the liabilities of shareholders, employees and directors. This protects personal assets as shareholders aren't liable for debts held by the corporation.
  • As its own legal entity, it's straightforward to sell or change management of the organization.

What Is a B Corporation?

A B corporation, or benefit corporation, is a type of corporation which aims to have a positive public impact in addition to achieving profit. A B corporation will consider its impact on the environment, community and workers alongside its aim of profit.

C corporations will generally have profit as the main driving force for business decisions and strategy. B corporations put profit on an equal footing with considerations around the environment, community and its workers. B corporations also emphasize transparency, with the publishing of annual reports on environmental and social impact.

Companies and organizations with clear community and environmental values may choose to become B corporations. This would result in all strategic decisions being considered against the public benefit it may achieve. B corporations can utilize the traditional strengths of corporate structure and align them with addressing wider public needs.

B corporations add a level of legal protection to environmental and social considerations. Owners are bound to these considerations, meaning a continuation of corporate aims even if the company is sold to new owners.

B corporations are recognized by around 36 states in the USA. B corporations will consider the company's impact on:
  • Society and the wider public.
  • Local communities.
  • Local and worldwide environment.

B corporations must create an annual report focusing on the public benefit of the organization. This is to encourage transparency on issues like the environmental and social performance of the corporation. Although the standards differ across the different states, producing the transparency report is a requirement for B corporation status.

Benefits of Becoming a B Corporation

Becoming a benefit corporation is useful to large companies that have environmental or social considerations as a core part of their mission. B corporations must address environmental and social issues alongside their goals of shareholder profit. This helps organizations achieve long-term sustainability in both a financial and environmental sense.

Environmental and social considerations are becoming ever more important to consumers and organizations. A traditional corporation will usually focus on profit, reputation, and the quality of the product when making strategic decisions. A B corporation will embed wider social and environmental considerations into this top-level strategic planning.

Benefits of becoming a B corporation include:
  • Aligns corporate decisions with company values and mission statements.
  • Combines for-profit corporate structures with not-for-profit ideals.
  • Positions environmental and social considerations alongside profits as the main driving forces behind the corporation.
  • Gives legal protection to environmental and social considerations, so they remain integral to the corporation even if it's sold to new owners.
  • Gain publicity as an organization with a social conscience.

What Is a Government Corporation?

Government corporations are companies and organizations owned or funded by the government. These corporations will usually provide public services, and are kept separate from government departments, agencies, or commissions. This is to ensure political neutrality and independence in the provision of public services.

Government corporations will usually run with the same independence as a private business. The companies can reflect the corporate structure used by the industry. However, government corporations may also hold objectives relating to wider public policy. This might include investing in public access to services or encouraging social integration. Certain government corporations will also have a centralized budget, adding another level of accountability to financial decisions.

Government corporations are usually found in services, sectors and infrastructure which are vital to the public or society. This might include government-owned rail operators, broadcasting and postal services. Natural resources or energy production are also usually at least partially owned by the government or state. There are a range of publicly owned corporations across the USA, such as the United States Postal Service.

Corporations might be chartered by the government, be private companies absorbed by the government in nationalized industries, or temporarily owned by the government because of debt. In the USA, government corporations can be chartered by the federal, state and municipal governments.

Government-Sponsored Corporations

In addition to government-owned corporations, there are organizations and companies which are partly funded by the government. These are known as government-sponsored corporations. A key example of this is within the financial industry. Corporations might receive subsidies from the government to offer certain loans or mortgages, insured by the government. By part-funding the operation, the government can also regulate these corporations when required.

What Is a Multinational Corporation?

A multinational corporation is a company that has facilities in more than one country or makes more than a quarter of its revenue from international operations. In essence, a multinational corporation has assets, offices, or factories in countries across the world.

Multinational corporations often have one main head office to manage their global business strategy, with smaller offices or factories in different global areas. Corporations may also have regional headquarters for different international markets.

Because of their global scope, multinational corporations will usually have a much larger budget and revenue than national corporations. This gives multinational corporations more bargaining power when seeking new areas to create facilities. Governments across the world see the benefit of attracting multinational corporate investment, so are likely to offer favorable subsidies or co-investment programs. Production facilities may be created within a country to cut down on the long-distance transfer of products or moved to a country with lower production costs. Multinationals may also place their head office in a country with low corporate tax rates.

The Benefits of Becoming a Multinational Corporation

Moving facilities or operations to countries around the world can bring many benefits to a corporation. Corporations can reduce the price of production and gain access to new markets to sell products and services. Multinational investment brings high-quality jobs and facilities, which can attract subsidies and partnerships with governments across the world.

The benefits of a multinational corporation include:
  • A global business can seek out the best markets for products or services.
  • Bring high-value jobs and facilities to different economies.
  • Utilize favorable tax rates and government subsidies across the world.
  • Reduce product prices through operational savings but ensure a global level of quality.

What Is a Close Corporation?

A close or closed corporation is a corporation which has privately owned stocks or shares. Such an organization will have been through the process to be incorporated but are closed to wider investment from the public. Close corporations are usually owned by families or small groups and are unlisted on the stock exchange.

Privately held corporations have the same benefits as other corporations. They offer protection of shareholders' personal assets, keeping financial liabilities within the corporation. The approach gives companies much more freedom in how they operate, as they are not liable to other external shareholders or stakeholders. Close corporations can avoid the burden of producing reports and financial insight for external shareholders every quarter.

It's worth noting that with no avenue for public shares or stocks, it can be difficult for close corporations to raise funds in the same way as other corporations.

Benefits of a Close Corporation

For family-owned companies or organizations with managers and employees as shareholders, becoming a closed corporation has clear benefits. This approach brings the positives of becoming a corporation, with the benefits of keeping major stakeholders in control of the company.

The benefits of a close corporation include:
  • Keep the personal shareholder assets separate from the company, avoiding issues of liability.
  • Favorable corporate income tax rates in some states.
  • Keep internal shareholders as the main driving force within the corporation.
  • Avoid pressure from external shareholders or stakeholders.

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Kerie Kerstetter
Kerie Kerstetter is the former Senior Director of Content Strategy for Diligent and the Next Gen Board Leaders.