What is the definition of a corporation? This article will explain the basics of the corporate entity as well as the different classes, or subdivisions, of a corporation.
When people hear the term “corporation” the image that automatically comes to mind is that of a huge multinational conglomerate in which billions of dollars of revenue flow annually.
While that is most definitely true in the case of some of the larger corporate entities, a corporate entity is not defined by the income generated. Rather, it is a specific classification of the legal structure of a business.
On a baseline level, a corporation is not unlike an LLC in the sense that it creates a separate business entity from the individual. As a separate legal entity, a corporation can conduct business and various financial transactions under its corporate name as opposed to the name of an individual owner.
As such, many legal and liability protections are afforded to management that would to be provided in a sole proprietorship or partnership agreement. Since a corporation is a legal entity, it must be formed in accordance with state laws.
As such, articles of incorporation must be filed with the Secretary of State’s office. The paperwork must be accurately filled out and the proper fees must be included as well.
Differences in an LLC and Definition of a Corporation
So what is the organizational difference between a corporation and an LLC? Corporations are comprised of board of director members and shareholders. The board of directors is responsible for the hiring and oversight of the officers (managers) of the corporation to handle the day to day duties of the corporation although the major business decisions are made by the board.
Often, the members of a board of directors are elected (or removed) by stockholders. A corporation also must abide by its own established bylaws which will define the governing rules of the corporation. These bylaws are not set in stone and may be amended along the lines of the corporations’ bylaw amendment process.
Classifications of the Corporate Entity
The definition of a corporation can be further subdivided into a C Corporation and an S Corporation. The differences between the two classifications center on taxation issues.
A C Corporation pays double tax; that is, the business is taxed and then the after tax profits are distributed to the shareholders who then must pay personal income tax on their earnings.
An S Corporation, however, does not pay any business tax. Instead, there is a “pass through” tax no different than a sole proprietor or a partnership. Of course, this begs the question why any corporation would choose to be taxed twice as opposed to once.
Well, there is certain rules ad criteria involved with such classifications. For example, corporations with over 75 shareholders will more than likely be rejected for an S Corporation classification.
If a company is looking to expand significantly in size then it probably would benefit greatly by forming a corporation.
This is because a corporation will have many benefits other classifications do not such as the ability to raise investment capital, the ability to take the company public, etc.
While it is not without precedent for LLC’s to do the same thing corporations have a greater track record for success in this arena.
So, if significant growth and expansion is the company’s goal then, given the definition of a corporation, incorporating as a corporate entity might be the best option.