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What are characteristics of corporations?

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Quick Answer

A corporation is an independent legal formation owned by a group of shareholders. Due to its distinct legal status, a corporation is awarded several rights and responsibilities, including the ability to borrow and lend funds, hire and fire employees, pay taxes, own assets and enter into contracts.

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As a distinct legal entity, the corporation itself — and not the shareholders who collectively own the corporation — is liable for all debts and claims made against the business. This limited liability structure allows shareholders to claim portions of the corporation's profits, while eliminating personal liability for the entity's debts.

Corporations are established through the process of incorporation, which requires strict adherence on the part of the shareholders to the laws of the state where the corporation files. Due to the complexity, substantial tax requirements and administrative obligations of corporations, incorporation is sought typically by large and established businesses. Corporations are required to pay federal and state income taxes.

Following the incorporation process, shareholders elect a board of directors who are collectively responsible for managing the entity. Corporations can be held privately or can operate by selling ownership shares on the stock market. Some corporations offer stock shares, and therefore ownership status, to employees as a benefit and incentive.

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