BizTerm Definition
Corporation
Full Definition

A legal structure authorized by state law that allows a business to organize as a separate legal entity from its owners. A corporation is often referred to as an "artificial legal person," meaning that, like an individual, it can enter into contracts, sue and be sued and do the many other things necessary to carry on a business.

One advantage of incorporating is that a corporation's owners (shareholders) are legally shielded from personal liability for the corporation's liabilities and debts (unpaid taxes are often an exception).

In theory, a corporation can be organized either for profit-making or nonprofit purposes. Most profit-making corporations are known as C corporations and are taxed separately from their owners. Some C corporations, who request special tax treatment from the IRS under subchapter S of the Internal Revenue Code, are pass-through tax entities where all profits or losses "pass through" to the owners and therefore federally taxed on the personal income tax returns.

Example: John, Sara and Aaron, equal partners in a retail plant nursery, decide to incorporate to attain limited personal liability from business debts (as partners, they were all personally liable for business liabilities). After picking a business name, they file Articles of Incorporation with their state's Secretary of State, issue shares of stock to themselves and hold an organizational shareholders' meeting at which they adopt bylaws and elect themselves corporate directors. They also notify all creditors of the partnership of their corporate status and arrange to pay off all of them who do not wish to extend credit to the corporation.

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