1.2 The Corporation

What is a corporation? You may have noticed that the Latin word “corpus” seems to appear within it. Indeed, it is a body! It is not human or animal, and it has no physical shape. You cannot see it or touch it. It will have components that take physical form, such as a building or inventory, but the corporation itself is non-corporeal.

So, what is it? It is a legal entity. It exists only as a legal construct. As such it is said that the corporation is a “person” under the law. It exists in a legal sense. It can be sued. It can be fined. It is owned by people who purchase ownership interests in it. These interests or “claims” are called “shares” or “stock.” Owners are referred to as “shareholders.” Shareholders have a claim on the company’s profits. We may thus also refer to this type of corporation as a “stock corporation.” It is in business – generally speaking – to make money for its shareholders, although it may serve other more altruistic purposes as well.

The corporation, thus, as an independent person, is legally separate from the owners. The corporation may be sued for damages, but the owners may not be – unless the court determines that the owner is somehow legally liable for a wrong-doing himself and apart from the separate actions of the corporation. Therefore, the owners are protected from legal responsibilities. This does not absolve corporate managers from legal malfeasance if they did other wrongs, e.g., dumping waste illegally.

One downside to the owners is that the corporation itself is a taxable entity. It pays income taxes and then the shareholders, once again, will pay income taxes on any profits distributed to them. These profit distributions are called “dividends.” We class this “double taxation.”

Of course, there are numerous other means by which a company may be organized in order to avoid double-taxation, but not all will provide the umbrella protection that the corporation provides. You can learn about these business forms in a Management or Tax course.