What Is A Corporation?

Most businesses start as small companies, owned by one person or a partnership. The most common type of business with multiple owners is a corporation. The law sees a corporation as a real, live person. A corporation is treated as a distinct and independent individual with rights and responsibilities as an adult. A corporation’s “birth certificate” is the legal form filed with the Secretary of State where the corporation is created or incorporated. It must have a legal name, just like a person.

A corporation is separate from its owners. It’s responsible for its debts. The bank can’t come after the stockholders if a corporation goes bankrupt.

A corporation issues ownership shares to persons who invest money in the business. These ownership shares are documented by stock certificates, stating the owner’s name and how many shares are owned. The corporation has to keep a register, or list, of how many shares everyone owns. Owners of a corporation are called stockholders because they own shares of stock issued by the corporation. One share of stock is one unit of ownership; how much one share is worth depends on the total number of shares that the business issues. The more shares a business issues, the smaller the percentage of total owners’ equity each share represents.

Stock shares come in different classes of stock. Preferred stockholders are promised a certain amount of cash dividends each year. Common stockholders have the most risk. If a corporation ends up in financial trouble, it must pay off its liabilities first. If any money is left over, that money goes first to the preferred stockholders. If anything is left over after that, that money is distributed to the common stockholders.