Characteristics of corporations
/What is a Corporation
A corporation is a legal entity whose investors purchase shares of stock as evidence of their ownership interest in it. This entity acts as a legal shield for its owners, which means that they are generally not liable for the corporation's actions, though they can benefit from dividend payments and any appreciation in the value of their shares.
What are the Characteristics of Corporations?
Corporations have certain characteristics that are unique to this form of organization (as opposed to a sole proprietorship, partnership, or LLC). These characteristics are noted below.
Capital Acquisition
It can be easier for a corporation to acquire debt and equity, since it is not constrained by the financial resources of a few owners. A corporation can sell shares to new investors, and larger entities can issue bonds to obtain a significant amount of debt financing. This is especially easy for public companies, since investors can subsequently trade these securities on a stock exchange.
Dividends
A corporation pays its investors by issuing dividends to them. This differs from the distributions made from a partnership or sole proprietorship to pay their owners. A downside is that the dividends are taxable to the recipients.
Double Taxation
A corporation pays income tax on its earnings. If it also pays a dividend to its investors, the investors must pay income tax on the dividends received. This constitutes double taxation of the earnings of the corporate entity. This issue can be avoided if the corporation is organized as an S corporation instead.
Life Span
A corporation can theoretically operate forever, outlasting its owners. Conversely, the owners may decide to terminate the corporation at any time. Realistically, most corporations are eventually shut down or merged with other businesses.
Limited Liability
Any liabilities incurred by a corporation are not also transferred to its shareholders. Instead, anyone trying to enforce a liability can only pursue the corporate entity for satisfaction. This protective shield is a great benefit for shareholders.
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Ownership
Ownership in a corporation is based on the number of shares owned. Buying or selling these shares shifts the ownership of a corporation to a different investor. A public company that has its shares traded on an active stock exchange may have thousands or millions of owners.
Professional Management
In many cases, the investors who own a company are not actively engaged in its management. Instead, they hire professional managers to handle the oversight of the business on their behalf. This can result in improved management, especially in comparison to the alternative of having disinterested or incompetent family members running a business.
Separate Entity
A corporation is considered to be an entirely separate operating and legal entity. It operates separately from its owners, and has many of the rights and responsibilities of a person.