What is a Corporation?

A corporation is an organizationusually a large businesswith specific characteristics.

Under law, corporations are deemed separate legal entities from their owners. This means that corporations themselves, not the owners, are legally liable for their actions and debts. If a corporation incurs debts, creditors have claims against the assets of the corporation, not the personal assets of the owners. This is called limited liability, and is a major corporate advantage.

Joes Lawn & Garden is not a corporation. Joe and ten other people are owners who share the profits. The company is sued for $500,000, but the company only has $350,000 in assets. All ten of the owners must dig into their personal assets to pay off the remaining $150,000.

Now instead, lets say Joes Lawn & Garden became a corporation the year before, and is now called Joes Lawn & Garden Incorporated. The company is sued for $500,000, but it only has $350,000 in assets. Although creditors may collect the $350,000, the corporation owners are not personally liable for the rest.

The advantages of forming a corporation include:

-limited liability

-ability to raise money by selling shares

-separate corporate tax treatment

- and advantages when recruiting employees

Disadvantages include the time, complex paperwork and costs to form a corporation. In addition, in some cases, profits of a corporation are double taxedonce when the corporation pays taxes, and again when the owner receives dividends and pays his own taxes.

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What is a Corporation?