What is a corporation?

When the average person hears the word "corporation" an image of a monster often appears. This monster pollutes the environment, corrupts public officials and destroys jobs. On some occasions, such charges are true. But most of the time, corporations are beneficial entities that we depend on for most of the things that we use in our daily lives.

 

A  corporation is a legal entity. A legal entity is a "person" created by the laws of the state.  The corporation  has a life that is separate  from its owners and managers. A corporation can own property in its own name. It can borrow money, it can sue and be sued in its own name. A corporation can be liable for certain types of crimes. Normally the shareholders are not liable for the actions of the corporation.  Generally, if a corporation goes out of business, a shareholder cannot lose more than what he paid for his shares.  A corporation has an indefinite life. Some corporations in the United States have been in existence for over two-hundred years.

 

Corporations have an ability to raise capital that is limited only by their ability to issue shares of stock. For this reason, almost all large businesses are corporations.  The largest corporations have gross sales that are greater that the gross national products of many of the world's nations. Such corporations often have hundreds of thousands of shareholders.

 

Corporations are created by the laws of the individual states. A person who wishes to create a corporation files an application with the Secretary of  State  of the state in which he wishes to incorporate. The information on the application varies from state to state. A typical application includes some or all of the following:

the name of the corporation,

the name and address of an individual who can be contacted in the event that someone wishes to sue the corporation,

the type and number of shares of stock that the corporation wishes to issue

the par or stated value of the shares to be issued

the names and addresses of the individuals who are creating the corporation

other information, if any, that is required by state law

Once the state's secretary of state approves the application for incorporation, the corporation sells shares of its stock. The money received from the sale of stock is used to by things that are needed for the corporation to operate during the first few months or year of its life.  The things needed to operate vary with the type of corporation. They might include merchandise that the corporation will sell to the public, machinery needed to make the products that the corporation intends to sell, raw materials to used to make a product, rent on the building that the corporation uses to make or sell its products, salaries of employees, computers, office supplies, the list is endless. The money that is earned from the first sale of products or merchandise is then used to buy additional merchandise, raw materials etc. that is again sold to the public.

If a corporation's sales are greater than its expenses, it is said to have make a profit. If the corporation has a profit at the end of its financial year, and it has enough cash available, it can pay some of that profit to the shareholders. This payment is called a "dividend".

The shareholders of a normal corporation are free to sell their shares to whomever will buy them. Corporation shares are often sold in organized markets such as the New York Stock Exchange.