In the simplest meaning of the term, an American corporation is a
legal entity formed in compliance with "statutory requirements." The
entity is distinct from its
shareholder-owners. It can consist of one person or many shareholders, combining to become identified under a
single name. In the corporation, there is a
board of directors, entrusted with the responsibility of the firm's
overall management. The
shareholders select the members of the board.
The advantages:
- There is limited liability of the shareholders. The owners of the corporation are not responsible for debts or liabilities incurred by the corporation. In most cases, only the assets of the corporation itself will be used to pay off debts and obligations.
- The corporation has perpetual existence, meaning that the death of a shareholder or a selling of ownership rights does not terminate the existence of the corporation.
- The shares of stock are transferable, so that owners can sell off their ownership rights to other people.
- There is a tremendous opportunities for growth because corporations have more access to public capital markets.
The disadvantages:
- The corporation is more difficult to form than other forms of organization. A corporation requires statutory authorization. That means that the firm requires the state which they are based in to approve the existence of the entity. Because corporations are bound by state law and the liberality of Delaware's corporation laws, many corporations base themselves in Delaware, even though they do business in other places.
- There is double taxation. This is perhaps the greatest disadvantage of a corporation. The corporation itself pays income tax on net profits and shareholders pay income tax on the dividends they receive.
- Corporations are required to pay organizational fees, annual fees, and give annual reports.
- To do business in other states, the corporation must obtain a certificate of authority for that state, qualifying them to do business there.
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