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A corporation is a legal entity distinct from its owners and formed for the purpose of conducting business.  A corporation is created by filing Articles of Incorporation with the state and is governed by the corporation’s own bylaws.     Once formally incorporated, it can sign contracts, own property, sue and be sued.  It continues to exist when the owners change or die.

Corporations are subject to numerous legal requirements.  They must hold director and shareholder meetings, create meeting minutes and formal declarations, and file annual reports.  Failure to do so can have serious legal consequences. It’s easy to raise money or attract investors by selling shares of stock. 

Features of a Corporation

Shareholders generally have limited liability. If a corporation fails, shareholders only lose their investment.  With very few exceptions (see below), they are not liable for the acts or debts of the corporation.  Only the corporation itself is liable for the corporate obligations.

Management of a corporation is consolidated in the board of directors.  The shareholders elect the board of directors.  The board of directors manages the corporation but will usually appoint corporate officers to handle the day to day affairs.

Shares, which represent ownership of the corporation, are easily transferable.  The shares may be privately owned or publicly traded, e.g., on a listed exchange like the New York Stock Exchange.  The shareholders of privately owned corporations, sometimes referred to as “closely held”.

A corporation is generally subject to “double taxation.”  It is first taxed on its income at the corporate level.  When a corporation distributes profits to its shareholders in the form of salary, dividends, or bonuses, the shareholders must then declare that income on their personal tax forms.  Consequently, the profit is taxed once at the corporate level and once at the shareholder level.  Corporations that meet certain requirements may elect S corporation status and thereby “pass through” profits and losses directly to shareholders.

Exceptions to Limited Liability

In some circumstances courts may hold shareholders personally liable for the acts and debts of a corporation.  This is called piercing the corporate veil.  This may occur if shareholders:

• Fail to comply with corporate formalities;
• Fail to invest enough money to adequately run the business and cover its projected liabilities; or.
• Use the corporation to commit a fraudulent or illegal act that causes harm to someone else.

Corporate Formalities

To ensure that a corporation maintains its status as a separate legal entity, it must comply with certain legal formalities, such as:

• Filing annual reports;
• Regularly holding meetings of directors and shareholders; and,
• Separating business records and transactions from those of the owners themselves.