The Corporation Defined : what is a corporation?

Up to this point we have been studying the Solana Beach Bicycle Company, which is an individual proprietorship. In other words, the business has one owner—Samantha. She has invested some of her own money into the company as well as borrowing some additional money. Now Sam is thinking of growing her business. She has heard that by using other people’s money, she will have more working capital and have the ability to expand the business. She has decided to investigate the possibility of incorporating her business and selling stock in her business. But what is a corporation, really?

Corporation Defined

what is a corporation ?

A corporation has been defined as “an artificial being” independent from its owners, legally a separate entity. Corporations can be set up as for-profit or not-for-profit. For-profit corporations depend on making money in order to continue into the future. Not-for-profit corporations do not depend upon this profit to continue.

These types of business, rather than depending on their profit, depend on gifts and grants from the public and private sectors for their continuation. Examples of not-for-profit corporations include charities, governmental, educational, and recreational organizations.

The Other Side of Incorporation: Although incorporation has many benefits, it should also be noted that the proprietor loses partial or majority control to the other stockholders. Also, the amount of paperwork and oversight increases.

Before making the decision to incorporate you should seek professional advice from your accountant, lawyer, and financial advisor regarding the pros and cons.

A corporation is given the right to operate (a charter) from the state in which it incorporates, but the fact that a business is incorporated in one state, does not mean that it cannot operate in the others. Due to differing tax laws and the incorporation fees, some states have become more advantageous to incorporate in than others.

Characteristics of a Corporation

There are several characteristics that differentiate a corporation from other forms of business. One of the characteristics of a corporation that distinguishes it from a partnership or a proprietorship is that it has have limited liability. This means that the creditors of a corporation can lay claim only to the Assets of the corporation.

Creditors of partnerships or proprietorships, on the other hand, can turn to the personal Assets of each owner whenever the Assets of the unincorporated firm are not sufficient to meet the creditors’ claims. Because of this corporate characteristic, the states have laws that restrict the stockholders’ right to withdraw Assets from the corporation.

Each state has a law that prevents a corporation from paying dividends (that is, owners withdrawing Assets) whenever the net Assets (Assets minus Liabilities) are at or below a certain level. This minimum net Asset figure is often called the legal capital of a corporation.


• Is chartered as a legal and separate entity by an individual state
• Protects the personal Assets of the owners (stockholders) against creditors’ claims (limited liability)
• Can issue capital stock to raise money
• Can issue dividends to stockholders
• May not issue dividends that would reduce the legal capital below a designated level

There are a number of reasons why a company would consider incorporation. Some of these reasons might include:

1) gaining the use of additional cash without the owner putting in his/her own personal funds;

2) removing legal liability from the individual and protecting his/her personal Assets;

3) securing various tax advantages. Incorporation may even provide the company with more credibility in the eyes of the business community and the general public.