The Definition of a Corporation: Everything You Need to Know

Corporations are a ubiquitous part of modern life. From the largest multinational conglomerates to the small business down the street, corporations touch nearly every corner of the economy. But what exactly is a corporation? How do they work? Why were they invented in the first place?

This comprehensive guide will answer all your questions about the corporate form. We‘ll cover the basics of what defines a corporation and explore the history, benefits, drawbacks, and future of this dominant business structure. Whether you‘re an entrepreneur considering incorporation or just a curious citizen, read on to boost your corporate literacy.

What is a corporation in simple terms?

Let‘s start with the textbook definition: A corporation is a legal entity that exists separately from its owners, who are known as shareholders. While there are many types of corporations (which we‘ll get into below), they all share this fundamental characteristic.

The owners of a corporation are not personally liable for the company‘s debts and obligations. If the corporation goes bankrupt, the shareholders can only lose the money they invested in the company – their personal assets like houses and cars are protected. This concept is called limited liability.

Corporations are formed under state laws. Once incorporated, a corporation has many of the same legal rights as a person. It can enter contracts, hire employees, own property, pay taxes, sue and be sued. But unlike a human person, a corporation can exist perpetually. It is not dependent on the lifespan of any individual shareholder, director, or employee.

Corporations are ultimately controlled by their shareholders, but directly managed by an elected board of directors. The board hires officers like the CEO to handle the day-to-day operations of the company.

One of the key features of corporations is the ability to raise money by selling partial ownership stakes in the form of stock shares. This allows corporations to accumulate vast sums of capital to invest in growth. Shareholders can then buy and sell their shares on public stock exchanges.

A brief history of the corporation

The concept of the corporation dates back to ancient Rome, but the modern corporation emerged in 17th century Europe with government-chartered companies like the Dutch East India Company. These early corporations were granted monopoly privileges by the state to promote investment in colonial trade ventures.

In the United States, the Constitution did not originally mention corporations. After gaining independence, the former colonies assumed the right to grant corporate charters. The first U.S. corporate charter was granted by New York in 1784 for the Bank of New York, which still operates today as part of BNY Mellon.

In the early 19th century, the Supreme Court case Dartmouth College v. Woodward (1819) established the principle that corporate charters are contracts and therefore protected under the Contracts Clause of the Constitution. This limited the power of states to interfere with private corporations.

Over the course of the 19th century, states began to pass general incorporation laws, which allowed any group of individuals to form a corporation by simply filing paperwork without needing explicit approval from the legislature. Massachusetts was the first state to do so in 1851.

The late 19th century saw an explosion of new corporate activity, especially after New Jersey enacted an extremely permissive incorporation law in 1889. Powerful trusts formed to monopolize entire industries, prompting the Sherman Antitrust Act of 1890.

In the 20th century, corporations only continued to grow in size and influence. In 1901, U.S. Steel became the first billion-dollar corporation. By mid-century, multidivisional conglomerates like General Electric spanned the globe. Economists coined the term "multinational corporation" in the 1960s.

More recently, digital platforms like Apple, Amazon, and Google have become the world‘s most valuable corporations. As of 2021, there are over 2.1 million corporations in the United States with nearly $30 trillion in combined revenue according to the U.S. Census Bureau.

Benefits of forming a corporation

So why do so many businesses choose to incorporate? There are several major advantages to the corporate structure:

  1. Limited liability protection: As mentioned above, shareholders are not personally responsible for corporate debts and liabilities. This reduces the financial risk of starting a business.

  2. Access to capital: Corporations can raise substantial funds by selling stock to investors. This enables corporations to grow and expand far beyond what would be possible for an individual owner.

  3. Perpetual existence: A corporation can outlive its original founders, providing continuity and stability. Ownership can be transferred through the sale of shares without disrupting operations.

  4. Tax advantages: Corporations can deduct normal business expenses and provide employee benefits like health insurance and retirement plans on a tax-advantaged basis. Some corporations can avoid double taxation on profits.

  5. Credibility: Incorporation provides a business with instant legitimacy. Consumers, vendors, and lenders may prefer to do business with an established corporate entity.

Types of corporations

Not all corporations look alike. There are several different types of corporations, each with their own specific characteristics and tax treatments:

  • C corporations are the most common corporate structure. They are standalone legal entities owned by shareholders. C corps pay a corporate income tax on their profits. When those profits are distributed to shareholders as dividends, they are taxed again at the individual level, resulting in "double taxation". Well-known examples include Coca-Cola, Disney, and Microsoft.

  • S corporations are designed to avoid this double taxation. They are pass-through entities where income and losses flow directly to the shareholders‘ individual tax returns. But S corps are subject to more restrictions, such as a 100-shareholder limit and a single class of stock. They are popular with small businesses.

  • B corporations are for-profit companies that commit to creating public benefit and sustainable value in addition to generating profit. They must meet rigorous standards of social and environmental performance. Examples include Patagonia, Ben & Jerry‘s, and Warby Parker.

  • Close corporations are corporations with a small number of shareholders, usually 30 or fewer, that place restrictions on stock ownership and rarely trade shares publicly. They provide some of the benefits of incorporation with the greater shareholder control typical of a partnership.

  • Non-profit corporations are formed to serve charitable, educational, religious, or scientific purposes. They are tax-exempt organizations that do not have shareholders and must reinvest any profits back into the organization. Examples include the American Red Cross and Harvard University.

Criticisms of corporations

While corporations have been an engine of economic growth, they are not without controversy. Some of the most common criticisms of corporations include:

  • Corporate personhood: A series of Supreme Court decisions have granted corporations many of the same constitutional rights as individuals, such as freedom of speech in the form of political spending. Critics argue this gives corporations outsized influence and undermines democracy.

  • Short-termism: The focus on quarterly earnings and shareholder returns can lead corporations to prioritize short-term profits over long-term investments, sustainability, and social responsibility.

  • Externalities: Corporations may not bear the full social and environmental costs of their activities. For example, a factory may pollute a river, imposing cleanup costs on nearby communities.

  • Consolidation of power: Mergers and acquisitions can create mega-corporations with enormous market power. This concentration of corporate control can lead to monopolistic practices, political influence, and wealth inequality.

  • Tax avoidance: Large corporations are often able to exploit loopholes and shift profits offshore to minimize their tax bills. Critics argue this deprives governments of needed revenue and places a greater tax burden on individuals.

The future of corporations

As corporations continue to shape the global economy in the 21st century, there is ongoing debate about how to balance their benefits and risks. Some argue for reining in corporate power through reforms such as:

  • Overturning the doctrine of corporate personhood
  • Banning political contributions and lobbying by corporations
  • Taxing financial transactions and closing corporate tax loopholes
  • Strengthening antitrust enforcement to break up corporate monopolies
  • Requiring greater transparency and accountability in corporate governance
  • Mandating that corporations serve all stakeholders, not just shareholders

At the same time, a growing movement known as conscious capitalism argues that corporations can be a powerful force for social progress when they align profit with purpose. This includes initiatives like:

  • The rise of B Corps and benefit corporations that commit to high standards of social and environmental performance
  • Greater emphasis on corporate social responsibility and ESG (environmental, social, governance) investing
  • Increased consumer demand for ethical and sustainable business practices
  • The growth of impact investing and social entrepreneurship

Corporate statistics

  • There are over 2.1 million active corporations in the U.S. (Census Bureau, 2021)
  • 6.5 million corporations filed tax returns in 2020 (IRS)
  • U.S. corporations generated nearly $30 trillion in revenue in 2021 (Census Bureau)
  • The 500 largest U.S. corporations account for two-thirds of U.S. GDP (Fortune 500)
  • Small businesses make up 99.9% of all firms in the U.S. (SBA)
  • Corporations account for 80% of business tax collections (Tax Policy Center)
  • Around 80% of total business profits in the U.S. go to corporations (NBER)

Corporate FAQ

What is the difference between a corporation and an LLC?

A limited liability company (LLC) is a hybrid business structure that provides the liability protection of a corporation with the tax benefits and flexibility of a partnership. LLCs are generally simpler and more flexible than corporations.

What does it mean when a company "incorporates"?

Incorporation is the legal process of creating a new corporation. It typically involves choosing a business name, filing articles of incorporation with the state, and obtaining necessary licenses and permits.

What is a publicly traded corporation?

A publicly traded corporation is a company whose shares of stock are traded on a public stock exchange like the New York Stock Exchange (NYSE) or NASDAQ. This allows members of the public to buy and sell ownership stakes in the company.

What is the largest corporation in the world?

As of 2023, the largest public corporation by market capitalization is Apple Inc., followed by Saudi Aramco, Microsoft, Alphabet (Google), and Amazon. The largest private corporation is Cargill, an American agricultural commodities giant.

Do corporations pay taxes?

Yes, corporations are subject to corporate income tax at the federal and often state level. The Tax Cuts and Jobs Act of 2017 lowered the top U.S. corporate tax rate from 35% to 21%. However, many corporations are able to significantly reduce their effective tax rate through deductions, credits, and other strategies.

In conclusion, the corporation has been a truly revolutionary invention. Over the past 400 years, the corporate form has evolved from a rare privilege granted by the state to the dominant way of organizing business activity. The unique features of corporations, such as limited liability for shareholders and the ability to raise capital by selling stock, have enabled the creation of the modern industrial economy.

Corporations have generated incredible wealth and innovation. They have financed railroads, electrified cities, pioneered groundbreaking technologies, and connected the globe. Today, corporations span every sector of the economy, from manufacturing to media to medicine.

At the same time, the power and influence of corporations has also generated significant controversy and criticism. From the heyday of the robber barons to the Occupy Wall Street movement, there is a longstanding American tradition of suspicion toward big business. Debates continue to rage about the proper role and regulation of corporations.

As we move further into the 21st century, it is clear that corporations will continue to play a central role in shaping the future of business, technology, and society. Understanding what a corporation is, how they work, and their broader impact is essential for engaged citizenship in an corporate age.

Ultimately, the story of the corporation is the story of capitalism itself – a story of innovation and progress, but also of power and responsibility. As we look ahead, it falls on all of us – business leaders, workers, investors, consumers, and policymakers – to continuously assess the costs and benefits of the corporate system and strive to bend it toward the greater good.