Do You Know These 8 Basic Facts about Corporations?

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What is a Corporation?

Corporations are business entities that are separate from their owners; most corporations have shareholders, and the shares may be closely held by only a few individuals, or they may be offered for sale to the public (publicly held).

There is also such a thing as a non-stock corporation, which may be non-profit or for-profit, and which may be very closely held or formed for a specific short-term purpose.

 
How Does a Corporation Get Started?

The process of starting a corporation (called "incorporating") is relatively complicated, because of the number of documents that need to be prepared and filed.When the corporation is formed, corporate by-laws are prepared, to govern the over policy for the corporation. 

Corporations are formed by submitting Articles of Incorporation to the state in which the corporation is doing business. Corporations are taxed separately from their owners at the corporate tax rate. Other tasks in the incorporation process involve preparing corporate by-laws, electing officers, and other general business startup tasks. 

What are the Different Types of Corporations? 

Two basic types of corporations are those with stock and those with no stock. Within stock corporations, there are closely-held (by only a few people) and public (stock publicly traded). Corporations may also be non-profit, of different types.

 

Who Owns a Corporation? 

A corporation is owned by the shareholders (stockholders), each of whom owns a piece of the corporate pie, and each person has invested money in the corporation. Most corporations are closely held, with shares owned by just a few individuals. 

Who Runs a Corporation?

At the highest level, corporations have a board of directors that sets policy and does oversight, making sure the corporation is acting according to its mission and that it complies with federal, state, and local rules and regulations.

 

At the next level are executives who run the day-to-day operations of the corporation. These executives may also be shareholders and some may sit on the board of directors, depending on how the corporation is structured. These executives are paid employees. 

How Do Corporate Owners Get Paid? 

Shareholders are paid by receiving dividends based on the number of shares of stock they own. Corporate owners and others who work as employees are paid based on salaries, but they may also receive dividends as part of their benefit packages. 

How Does a Corporation Pay Taxes? 

Because  a corporation is a separate taxing entity, the corporation itself pays taxes, based on the net income (profits) of the corporation each year. An IRS Form 1120 is prepared to calculate the tax liability of the corporation. 

Corporations have a unique issue in the business world, of "double taxation." The corporation is taxed on its profits, then the owners of the corporation are taxed on the dividends they receive based on those profits. 

What Liability Do the Owners of a Corporation Have? 

Because corporations are separate entities, the debts and liabilities of the corporations are also separate from those of the owners.

This separation is sometimes called a "corporate shield" because the corporate structure shields the owners and employees from personal liability.