What Is a Corporation?

How a Corporation Is Created

A corporation comes into existence when an incorporator files a document, usually called Articles of Incorporation or a Certificate of Incorporation, with a state's business filing agency. Delaware's version of this rule is typical: under 8 Del. C. § 101, any person, partnership, association, or corporation, acting alone or with others, can serve as an incorporator, and under § 102 the certificate must name the corporation, its registered agent and office, its purpose, its authorized stock, and its incorporator. Once the state accepts the filing, the corporation is a distinct legal entity, separate from the incorporator, the shareholders, and anyone who later runs it.

Shareholders, Directors, and Officers

A corporation has three layers of people, and one person can hold roles in all three in a small corporation. Shareholders own stock and vote on major matters, including electing the board. The board of directors sets overall policy, approves major decisions, and appoints officers; most states let a corporation have a board of just one director. Officers, such as a president, secretary, or treasurer, run day-to-day operations under the board's authority. Keeping these roles distinct on paper, through bylaws, stock records, and meeting minutes, matters even when the same person fills every seat.

How a Corporation Is Taxed

By default, a corporation is what the IRS calls a C corporation: it files its own tax return, Form 1120, and pays federal income tax on its profit at a flat 21% rate under 26 U.S.C. § 11. If the corporation then distributes profit to shareholders as a dividend, the shareholders pay tax on it again, a pattern known as double taxation. A corporation that meets the IRS's eligibility rules, including a 100-shareholder cap and one class of stock, can instead file Form 2553 to elect S corporation status, which passes income through to shareholders' personal returns similarly to a partnership.

What Makes a Corporation Different From an LLC or Sole Proprietorship

A sole proprietorship isn't a separate legal entity at all; the owner and the business are the same for liability and tax purposes. An LLC is a separate entity, like a corporation, but it's taxed on a pass-through basis by default and has few state-mandated formalities. A corporation's defining features, compared to both, are its stock-based ownership, its board-and-officer management structure, and the heavier set of required formalities, bylaws, stock issuance, and documented meetings, that most states attach to it.

Why Businesses Choose the Corporate Structure

Businesses that plan to raise money from investors, issue stock options to employees, or eventually go public generally need a corporation, since a corporation's stock structure is what venture capital funds, employee option pools, and public markets are built around. An LLC or sole proprietorship can't offer the same standardized ownership instrument. Businesses that don't need outside investment or stock-based compensation often choose an LLC instead, for the simpler formalities and default pass-through taxation.

Public vs. Private Corporations

Most corporations are privately held, meaning their stock isn't traded on a public exchange and ownership is limited to a small group of founders, employees, and investors. A corporation becomes "public" only after it registers its securities with the SEC and lists its stock on an exchange, a separate and far more involved process than simply incorporating. Nothing about being incorporated, on its own, requires or implies that a corporation's stock is publicly traded.

Corporate Formalities Matter

A corporation's liability protection depends partly on actually running it like one: holding the meetings your bylaws call for, keeping minutes, keeping corporate and personal funds separate, and documenting major decisions. Skipping these steps is one of the more common reasons a court later disregards the corporate structure and holds an owner personally liable, a result often called piercing the corporate veil.

Choosing C vs. S Status Is a Tax Decision, Not a Legal One

Every corporation starts out as a C corporation under the IRS's default rules. Electing S corporation status changes only how the IRS taxes the business; it doesn't change the underlying state-law corporate structure, and it comes with its own eligibility rules and ongoing requirements, including paying a working owner a reasonable salary. Talk to a tax professional before electing, since the right answer depends on your profit level and plans.

Not Every Business Needs a Corporation

If you don't plan to raise outside investment or issue stock options, an LLC often delivers similar liability protection with less paperwork and more flexible, pass-through taxation by default. Consider why you want the corporate structure specifically before filing, rather than assuming it's the default choice for every small business.

State Rules Vary

The details, filing fees, minimum number of directors, annual report requirements, differ by the state where you incorporate. Check your specific state's corporation statute and filing agency before you file, rather than assuming every state follows the same rule.

This Isn't Legal or Tax Advice

The facts here describe how corporations generally work as of this article's last review date. Talk to a business attorney or tax professional about your specific ownership plans before choosing or forming a corporation.