A corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued own assets, remit federal and state taxes, and borrow money from financial institutions.
The creation of a corporation involves a legal process called incorporation where legal documents containing the primary purpose of the business, name and location, and the number of shares and types of stock issued, are drafted.
The process of incorporation gives the business entity a distinct feature that protects its owners from being personally liable in the event of a lawsuit or legal claim.
What are the Common Types of Corporations?
A corporation can be created by a single shareholder or by multiple shareholders who come together to pursue a common goal. A corporate can be formed as a for-profit or a not-for-profit entity.
For-profit entities form the majority of corporations, and they are formed to generate revenues and provide a return to their shareholders, according to their percentage of ownership in the corporation.
Not-for-profit entities operate under the category of charitable organizations, which are dedicated to a particular social cause such as educational, religious, scientific, or research purposes. Rather than distribute revenues to shareholders, not-for-profit organizations use their revenues to further their objectives.
How Do Corporations Work?
A corporation is required to name a board of directors before it can commence operations, and the members of the board of directors are elected by shareholders during the annual general meeting. Each shareholder is entitled to one vote per share, and they are not required to take part in the day-to-day running of the corporation. However, shareholders are eligible to be elected as members of the board of directors or executive officers of the corporation.
The board of directors comprises a group of individuals who are elected to represent shareholders. They are tasked with making decisions on major issues affecting the shareholders, and they also create policies to guide the management and daily operations of the corporation.
The elected members to the board of directors owe a duty of care to the shareholders, and they must act in the best interests of the shareholders and the corporation.
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