Because of the importance of the corporate form in the United States, the focus of this article is on corporations. A corporation is an â€œartificial entityâ€ created by law. It can own assets and incur liabilities.
A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.
The principal feature of this form of business organization is that the corporation exists legally and apart from its owners. An ownerâ€™s liability is limited to his or her investment. Limited liability represents an important advantage over the proprietorship and general partnership.
Capital can be raised in the corporationâ€™s name without exposing the owners to unlimited liability. Therefore, personal assets cannot be seized in the settlement of claims. Ownership itself is evidenced by shares of stock, with each stockholder owning that proportion of the enterprise represented by his or her shares in relation to the total number of shares outstanding. These shares are easily transferable, representing another important advantage of the corporate form.
Moreover, corporations have found what the explorer Ponce de Leon could only dream of finding unlimited life. Because the corporation exists apart from its owners, its life is not limited by the lives of the owners (unlike proprietorships and partnerships). The corporation can continue even though individual owners may die or sell their stock.
The corporate form of business organization has grown enormously in the twentieth century because of the advantages associated with limited liability, easy transfer of ownership through the sale of common stock, unlimited life, and the ability of the corporation to raise capital apart from its owners. With the large demands for capital that accompany an advanced economy, the proprietorship and partnership have proven unsatisfactory, and the corporation has emerged as the most important organizational form.
A possible disadvantage of the corporation is tax related. Corporate profits are subject to double taxation. The company pays tax on the income it earns, and the stockholder is also taxed when he or she receives income in the form of a cash dividend. Minor disadvantages include the length of time to incorporate and the red tape involved, as well as the incorporation fee that must be paid to the state in which the firm is incorporated. Thus, a corporation is more difficult to establish than either a proprietorship or a partnership.