The “C” corporation is the best known form of legal entity. It is a separate entity that can acquire, hold, and convey property, be sued and generally act in its own name. It derives its rights from statute and its articles of incorporation. A detailed statutory framework is provided for the creation, operation, and termination of corporations.
The shareholders of a corporation enjoy limited liability to the amount of their capital contribution (unless a court “pierces the corporate veil” and holds the stockholders personally liable). While a shareholder can lose his or her entire investment in corporate stock, he or she cannot be held responsible for corporate debts or liabilities in excess of his or her investment.
Corporate stock is also freely transferable, at least theoretically. The “theoretically” comes in because the stock may be subject to by-law or securities transfer restrictions and because sales of stock must be made after either an expensive registration process or in compliance with an exemption from registration. Although there are some transfers and sales of limited partnership and LLC interests, the corporate form is the only practical form to date that gives the owners of the business the chance to “hit the jackpot” by taking the company public.
In order to exist as a valid corporation, certain formalities in both creation and management must be followed. Capital (in the form of cash, property, or services) must be paid in exchange for shares. An organizational meeting must be held and bylaws adopted. An initial Board of Directors must either be named in the Articles of Incorporation or appointed at the organizational meeting. There must be annual meetings of both stockholders and directors, and minutes of those meetings must be kept.
Double taxation: As noted above, the corporation is a separate taxable legal entity, and therefore itself a taxpayer. It pays taxes, at corporate rates, on its own income, after taking into account any deductions or credits. If the corporation realizes losses, they are applied to its own tax return or carried forward for use in future years rather than “passed through” for use by the shareholders. Then, whatever portion of income is paid out in the form of dividends is taxed again as income to the shareholders.