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A corporation is a separate and distinct legal entity. This means that a corporation can open
a bank account, own property and do business, all under its own name. The primary advantage of a
corporation is that its owners, known as stockholders or shareholders, are not personally liable
for the debts and liabilities of the corporation. For example, if a corporation loses a big lawsuit
and is forced into bankruptcy, the stockholders will not be required to pay the debt with their own money.
If the assets of the corporation are not enough to cover the debts and liabilities, the creditors cannot look
to the stockholders, directors or officers of the corporation to recover.
Its board of directors manages a corporation, which is responsible for making major business decisions and overseeing
the affairs of the corporation. Like representatives in Congress, the stockholders of the corporation elect directors.
The directors appoint officers, who run the day-to-day operations of the corporation.
One major disadvantage of a traditional corporation is double taxation. A traditional corporation, known as a "C-corporation,"
pays a corporate tax on its income (the first tax). When the C-corporation distributes profits to its stockholders, the stockholders
pay income tax on those dividends (the second tax).
To avoid double taxation, corporations can make a special election to be taxed as a pass-through entity like partnerships and sole
proprietorships. In other words, there is only one level of taxation. The corporate profits "pass through" to the owners, who pay taxes
on the profits at their individual tax rates. Corporations that make this tax election are known as "S-corporations." Why doesn't every
corporation make this election? Because there are numerous restrictions imposed by the IRS for these types of corporations.
If the company lost money and didn't have the cash to pay its creditors, the partners had to make up the difference with their own money.
With the advent of the corporation, investors could be shielded from this type of liability, and as a consequence, more people were willing to
invest in business ventures.