Just What Is a Corporation, Anyway?
A corporation is a legal entity, created under state law, that is authorized to carry on an enterprise. This entity is distinct from its owners. In effect, a corporation is an artificial person brought into existence by an act of the state in which you incorporate.
More terminology: The owners of a corporation are called shareholders or stockholders (a share of stock is a unit of interest in the corporation). The shareholders elect a board of directors, which is responsible for managing the corporation, and the board appoints corporate officers who oversee day-to-day operations. In many small corporations, however, the business owner is also a director and corporate officer.
A key feature of a corporation is limited liability: shareholders' liability is limited to the extent of their investment in the corporation. Generally, this means that if your corporation goes bust, all you would lose are the assets held by the corporation. Personal assets such as your house, car, and personal bank account would be protected. (Ambrose Bierce had a point, as you can see).
Notice we said "generally." If you guarantee a loan with personal assets, or manage your corporation irresponsibly, you could conceivably forfeit those assets. More on this later.
While we usually think of corporations as huge enterprises, in fact they can be any size. If you're a one-person shop, you could incorporate without hiring any employees or partners.
Take a look at the table below, which compares key features of the three major categories of business ownership: sole proprietorships, general partnerships, and corporations.
| Sole Proprietorship | General Partnership | Corporation | |
|---|---|---|---|
| How created? | Owner creates it at will | Two or more people agree to create it | Charter must be issued by state |
| Legal position? | The owner is the business | A legal entity that is separate from owners | A legal entity that is separate from owners |
| Liability | Unlimited liability | Unlimited liability (unless it's a limited liability partnership) | Shareholders' liability is limited to their investments |
| Duration | Dissolved automatically on owner's death unless determined otherwise | Terminated by partners' agreement, bankruptcy, or by one or more partner's withdrawal or death | Can exist indefinitely |
| Transferability of interest | Interest can be transferred, but it's no longer your proprietorship | Interest can be assigned, although assignee lacks full partnership rights unless granted by other partners | Shares of stock can be transferred |
| Management | Entirely at owner's discretion | Each general partner has equal voice in management unless agreed otherwise | Shareholders elect a board of directors to set policy; board appoints officers to manage operations |
| Organizational and annual license fees, annual reports | None | None | All required |
| Transact business in other states? | Generally no limitations* | Generally no limitations* | Typically must qualify to do business and obtain certificate of authority |
Note: If you plan to give your business a name other than your own, you should register the business name as a so-called "fictitious" or "assumed name." This has nothing to do with incorporation. For more information, contact your state's Secretary of State.