Definition of Corporation

A "corporation" is a legal entity established under state law (and sometimes federal law such as a national bank) and is the preferred form of organization for many businesses. Unlike general partnerships or sole proprietorships, the owners of a corporation (the "shareholders" or "stockholders") have "limited" liability for the corporation's debts and obligations. As a result, the shareholders' potential losses generally cannot exceed the amount which they contributed to the corporation. The corporation has a Board of Directors (elected by the shareholders) responsible for the overall direction of the business, and officers who handle the day to day affairs of the corporation. The corporation must maintain "corporate formalities" to ensure the limited liability protection for its shareholders. In the U.S., corporations can typically be "C corporations" or "S corporations" which are tax designations. C corporations pay tax at the corporate level for its earnings, while S corporations are taxed not at the corporate level but at the shareholder level. As a legal entity, a corporation generally has the right to conduct business, to enter into agreements, to loan and borrow money, to hire employees, and to own assets. Ownership interest in a corporation is evidenced by the issuance of stock.