When starting a new business, entrepreneurs have the option to choose between several forms of business organization, including a sole proprietorship, partnership, or corporation. In this chapter, we will focus on the corporate form of organization and its role in accounting.
Definition of Corporation
A corporation is a legal entity that has its own separate existence from its owners. In the eyes of the law, a corporation is considered an "artificial person" with rights and responsibilities of its own.
Characteristics of Corporation
Some characteristics of a corporation include:
- Separate legal entity: A corporation has the ability to own property, enter into contracts, and be held responsible for its own debts under the law.
- Legal status in court: A corporation has the ability to sue and be sued as if it were a real person.
- Corporate charter: A corporation is created by obtaining a charter from the state in which it is incorporated.
- Income taxes: A corporation must pay income taxes on its earnings.
Differences between a Corporation and Other Forms of Business Organization
There are several key differences between a corporation and other forms of business organization, including:
- Perpetual existence: A corporation has continuous existence and is not dissolved by the death or retirement of any of its members.
- Personal liability: In a corporation, the creditors have a claim against the assets of the corporation rather than the personal property of the owners.
- Separation of management and ownership: In a corporation, the owners (shareholders) do not typically manage the daily affairs of the business, but rather hire officers to do so. This separation of management and ownership allows for greater specialization and efficiency.
- Transferability of ownership shares: Ownership in a corporation is represented by transferable shares of stock, which can be bought and sold without disrupting the business organization.