What’s a Corporation?

A corporation is the oldest form of business entity, and it’s the most widely used by large businesses and publicly-traded companies. It’s very formal and has a lot of flexibility as long as you follow the formalities. This is a common choice amongst entrepreneurs looking to raise funds from outside sources or companies who want to take advantage of specific tax considerations.

Corporations are limited liability entities (not to be confused with a limited liability company) which means that they provide a corporate “veil” or “shield” between the actions of the company and its owners. In the event that your company owes a debt or is sued, you can’t be held personally responsible for those debts (there are lots of rules that govern and limit this liability, but in general this is how it works).

Corporations come in two main varieties: C-corporations “C-corps” and S-corporations “S-corps.” A C-corp includes all the big companies trading on stock exchanges and most tech and manufacturing companies. C-corporations are taxed on their income before they pass on profits to the owners. This is sometimes called “double taxation” because your company is taxed and then you are taxed again on your personal income tax return.

S-corps were created to provide more flexibility and work for small business owners. S-corporations are tax pass-through entities and they avoid double taxation. They also have certain benefits in the way they are able to allocate losses which sets them apart from LLCs. However, there are certain limitations with an S-corp which have led modern entrepreneurs to use the benefits of an LLC. S-corps are limited as to the type and number of shareholders. There can only be one class of stock, which limits its ability to raise money or bring in investors.

Corporations are owned by shareholders. Corporations are managed by a “board of directors” which for new businesses are often made up of the owners. “Managed” means that the board of directors makes all the major decisions about the direction of the company. Corporations issue shares to show ownership. There can be one or many classes or levels of shares each with their own rights and perks.

Corporations are governed by their bylaws.