At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
A corporation stands as a powerful player in the global economy, embodying a legal entity with rights akin to an individual. According to the United States Small Business Administration, as of 2021, there are over 5.6 million corporations registered in the U.S. alone. These entities can be single-person operations or expansive collectives, known as sole and aggregate corporations, respectively. The Harvard Law School Forum on Corporate Governance indicates that corporations account for a significant portion of economic activity, with the 1,000 largest U.S. corporations representing about 80% of the total market capitalization of the U.S. stock market as of 2020. Understanding what a corporation is becomes essential as they influence job creation, innovation, and market dynamics, shaping the livelihoods and futures of countless individuals.
Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade.
A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.
A corporation may issue stock, either private or public, or may be classified as a non-stock corporation. If stock is issued, the corporation will usually be governed by its shareholders, either directly or indirectly. The most common model is a board of directors which makes all major decisions for the corporation, in theory serving the best interests of the individual shareholders.
In the United States there are three major types of corporations: Close, C, and S.
Close corporations issue stock, but the amount of shareholders is greatly limited, usually to less than thirty. Given the small number of shareholders, normally all are involved in board-level decision making. Transfer and sale of stock is also tightly controlled.
C corporations are the most common type of corporation in the United States. They allow for theoretically unlimited amounts of stock to be issued, and usually have a smaller board of directors which make decisions. C corporations pay taxes both at the corporate level, and at the personal level, as shareholders pay taxes on their dividends.
S corporations are virtually identical to C corporations, save that they have a special tax status with the IRS. Instead of paying taxes at both levels, S corporations are required only to tax their dividends--the corporation itself does not need to pay taxes.
While many people in the United States choose to incorporate in their own state--small businesses especially--some states have corporate charters that are particularly beneficial to certain types of business. Nevada, for example, does not require ownership records that attach names, making it ideal for corporations interested in protecting the private identities of their owners.
A number of books and websites have sprung up in recent years to aid small businesses to incorporate. There are two major benefits for most small businesses. The first is the substantial legal and fiscal protection in the event of litigation or bankruptcy. The second is a potentially uninterrupted, essentially infinite lifespan for the business. This is contrasted with a sole proprietorship, which may experience problems and complications should the owner die, while a corporation allows for the seamless passing on of the business.
Different states have different fees for incorporation, but most are extremely affordable. For anything more complicated than a simple sole proprietorship incorporation, an attorney is a necessity; and even for the most basic corporate structure, legal counsel is recommended.