There seems to be some confusion these days as to what a corporation is, so I pulled out one of my accounting textbooks from the first time I attended college.
A corporation is established under the authority of state law. In most cases a state official, frequently the Secretary of State, responds to a request for a corporate charter. The request is made by incorporators, who will become stockholders of the corporation. A coporate charter and related articles of incorporation describe the nature of business to be conducted, the classes and types of corporate stock to be issued, and other pertinent information. After a coporate charter is granted, the common stockholders elect a board of directors. In turn, the board of directors appoints members of corporate management, such as the president, several vice presidents, and other executives. The board of directors also approves the corporate bylaws under which the company operates.
Incorporators, aka: stockholders, are individuals with the same rights you and I have. They also have political views. Their organization just happens to be a corporation.
Types of Corporations
Corporations are usally considered stock-ownership companies that are organized for profit. There are, however, many other types of corporate organization. For example, public corprations may be established and owned by a unit of government to meet a social need. Examples include the Federal Deposit Insurance Corporation, which insures deposits in certain commercial banks or the Off Track Betting Corporation, which provides revenue to the City of New York from pari-mutuel horse race betting.
Mutual companies are cooperative organizations designed to benefit consumer groups. Shares are distributed to customers of the organization. Many life insurance companies and savings and loan associations are mutual companies. Policyholders of mutual life insurance companies and depositors of savings and loan associations are given the rights and privileges usually afforded owners in a stock company. Corporate profits can be distributed to the customers in the form of lower prices or as dividends.
In contrast to public corporations and mutual companies, private corporations are owned by individuals or institutions. Private corporations may be publicly held or closely held. Publicly held coporations are enterprises whose stock and other securities are registered with the Securities and Exchange Commission (SEC) and are usually actively traded in an organized securities market such as the New York or American Stock Exchange. Ownership of publicly held companies is usually widespread and may include many thousands of shareholders. Closely held coporations are those whose stock is held by a limited and well-defined group. Ownership is generally closed to prospective stockholders.
Two types of closely held corporations are the professional corporation and the S corporation. Professional corporations are established by members of a legally recognized profession, such as medicine, law, and accountancy. Ownership shares are usually available only to members of the profession. The purpose of this limitation is to ensure the integrity of the profession by minimizing conflict of interest and professional compromise. S corporations (so called because of subchapter S of the Internal Revenue Code) have many advantages of the corporate form, buth without the negative element of double taxation [more on that in a minute]. To maintain this favorable tax status, S corporations can have no more than 35 stockholders.
Most publicly held and some closely held corporations are subject to filing with the SEC.
Any company can choose to incorporate.
Corporations offer several important advantages over other forms of business, such as sole proprietorships and partnerships. For example, the corporate organization: (1) facilitates the accumulation of large amounts of capital; (2) provides for economies of scale in production due to the potential large size of corporate organizations; and (3) facilitates a capital market in which rescources are easily allocated to more efficient producers. Other characteristics of corporations that are often viewed as advantages include limited liability, in that stockholders have no personal liability for the debts of the corporation and risk only their capital investmentsl; and unlimited life of the corporation, in that the death of a stockholder does not cause the termination of the corporation, as in the case of the death of a partner in a partnership.
Unfortunately, the advantages of limited liability and unlimited life do not come without some cost to the stockholders. One cost is in the form of double taxation. A corporation, unlike a partnership or a sole proprietorship, is subject to taxation on net income. Furthermore, individual stockholders are subject to taxation on the distribution of that corporate net income as they recieve dividends. Therefore, income is taxed at the coporate level and again at the individual level.
Stockholders, who own the corporation, often are not involved in the custody and management of corporate assets. Financial accounting and reporting therefore provides valuable communication between the owners and the managers of a corporation. Those with custody of resources report on the efficiency and effectiveness of their performance to the providers of those resources. We classify resource providers of corporations in two categories: (1) owners, or stockholders; and (2) creditors.
Source: Williams, J. R., Stanga, K. G. & Holder, W. W. (1989). Intermediate Accounting. New York: Harcourt Brace Janovich, Inc.