Corporation Definition a Business Entity

Corporation Definition

A business entity can take the form of one of several legal organizations, each with its own advantages and disadvantages. The four basic business entities include sole proprietorships, partnerships, limited liability companies, and corporations. Furthermore, these companies can be divided into non-profit and for-profit organizations depending on the goals of the company. Corporations are unique in the way that they are structured and the power that the entity possesses, as opposed to other organizations.

A sole proprietorship is run by a self-employed individual "who operates a trade or business where all the tax consequences fall to that proprietor, including liabilities, debts, profits, and losses" (RMS Accounting, 2001). A partnership requires that two or more people enter into a contractual agreement as to how the business is to be run and how profits and losses will be shared. While a partnership is a separate entity for tax purposes, the partnership does not pay taxes as it is "a form of a conduit where income, losses, credits, and certain deductions are passed along to the partners' tax situation instead" (RMS Accounting, 2001). Like a sole proprietorship, partners in this organization do not have liability protection. A limited liability company (LLC) combines features found in a partnership with those found in a corporation. In order for an organization to qualify as an LLC, it must incorporate at least two of the main components of a corporation such as continuity, centralized management, and/or transferability of ownership.

A corporation can be defined as a "separate, legal entity formed through a state charter using articles of incorporation" (RMS Accounting, 2001). A corporation is authorized to perform all the basic business activities that an individual can perform "such as filing and paying taxes, signing contracts, and making loans" (RMS Accounting, 2001). Furthermore, a corporation is often formed through the issuance of stocks or securities, which help to generate revenue for the corporation. While a corporation can exist indefinitely and does not need to be dissolved after a management or ownership change, as a partnership could, it can be held liable for its actions and be prosecuted and punished if it violates the law. However, liability is limited to the corporation and offers owners' limited personal liability, which is something that is not found in a sole proprietorship or partnership (Corporation: Definition, Formation, Maintenance, 2012). Furthermore, a corporation is also considered to be a stand-alone entity that has separate tax liabilities; as such, the corporation is responsible for paying corporate taxes on any of the profits the company makes, however, each employee is responsible for paying takes on the money that is paid to them in the form of a salary, commission, or dividend (Lorette, 2012).