Posted in Finance, Accounting and Economics Terms, Total Reads: 620
A corporation is a legal entity formed for the sole reason of making operating business by a group of people called as shareholders who share ownership of the corporation. The sharing is represented by holding of common stock of the corporation. Like an individual, a corporation has the right to enter into contracts, borrowing and lending money, hire employees, own assets, sue and be sued and pay taxes but does not have the right to vote. A charter is issued by the state which gives a corporation the right to exist. All the companies listed in the stock exchanges are all corporations.
Corporations are formed by filing the articles of incorporation with the Registrar of Companies in each state and each can have a unique name. The stocks are issued to the shareholders in exchange of cash or other assets they transfer to in return for that stock after the corporation has been incorporated. to discuss the corporate affairs, shareholders elect the board of directors once a year. The directors and the shareholders adopt the bylaws that govern the corporation along with the articles of incorporation.
Corporations limit the liabilities of shareholders (called as limited liability) ,i.e. shareholders are liable to a maximum of their investment in the corporation even though the corporations bear massive liabilities in the wake of losses. As an example, consider the bankruptcy of Lehmann Brothers in September, 2008. Despite the liability of hundreds of billions of dollars owed by Lehmann Brothers to its creditors, the shareholders just lost only their investment in the bank and were not held liable for any more amount.
If the shareholders are the employees, then their salaries are deductible while their dividends are not deductible and hence do not reduce the corporation's tax liability.