Understanding Corporation
A corporation is a type of legal entity that is separate from its owners. Created under state or national laws, the legal rights and responsibilities of corporations are the same as the individuals possess. Corporations can enter into contracts, pay taxes, own assets, sue, or be sued independently of their shareholders.
A key feature of a corporation is limited liability. Shareholders benefit from the dividends and increases in stock value however, they are not personally liable or responsible for the corporation’s debts or legal obligations. Their risk is limited to the amount they invested in the corporations.
Types of Corporation
The four main types of corporations are:
C-Corporation:
- It is a standard corporation that is taxed separately from its owners. It can have an unlimited number of shareholders and is subject to corporate income tax.
- Profits are taxed at the corporate level, and dividends paid to shareholders are also subject to personal income tax (double taxation).
B-Corporation (Benefit Corporation):
- A for-profit corporation that produces public benefit on behalf of shareholders.
- Aim to meet high standards of social and environmental performance, accountability, and transparency.
- Achieve social missions while achieving high profits.
S-Corporation:
- A special type of corporation that allows profits, losses, credits, and deductions to be passed directly to shareholders’ personal income tax returns, to avoid double taxation.
- Requirements for an S corporation include- possessing a single class of stock and having 100 or fewer shareholders.
Non-Profit Corporation:
- A corporation organized for charitable, educational, religious, or other public purposes rather than for profit.
- Any profits, contributions, and donations must be reinvested into the organization’s operations or mission rather than distributed to shareholders. It is exempted from taxation.
How is a Corporation Formed?
A corporation is formed when a group of shareholders invests money in exchange for shares in an organization to pursue a shared goal. The goals of a corporation can be profit-oriented or non-profit, although many corporations focus on maximizing returns for their shareholders.
The Companies Act, of 2013, governs corporations, and their financial returns are taxed under the Income Tax Act of India, 1961.
Each year, the shareholders of a corporation elect a board of directors to manage the corporation’s day-to-day operations. The board is responsible for implementing the corporation’s business plan, ensuring its execution, and managing the corporation’s assets and liabilities.
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