What is a Corporation?
Business and owner are always separate entities. The company is considered as a different thing and its owner as another separate thing. In general, a business has two types, sole ownership, and partnership.
Sole ownership is those businesses owned or run by only one owner. On the contrary, partnership businesses run on partners. They invest together, and they own the company.
They are responsible for everything that happens to the business. It has the right to make decisions.
Corporations are different from regular business. It is a separate entity. It has its rights and responsibilities. It has a single owner who takes decisions and is responsible for anything that happens to a business.
It has a full right to take loans from wherever it wants, make contracts, hire or fire employees, change policies, and sue or be sued. Corporations sell their shares to the common public, and they must return them from the profit.
In corporations, shareholders enjoy the profit, and they are not responsible for the debts or anything of the company.
The corporation is divided into two categories
1. Public corporations: they offer their shares to the general public. Anyone can buy the share and becomes a part of the capital.
2. Private corporations: they don’t sell their shares.
Types of corporations here are list below:
- C corporation
- S corporation
- Not profitable corporations
- Professional corporations
C and S corporations are almost the same. Both are profit generating, but C Corporations have two levels of taxation. One of the total income and other when profit is being distributed among the shareholders whereas; S corporations is having only one level of taxation. They don’t tax during profit distribution.
Nonprofitable corporations are those which for educational, charitable, literacy, religious or scientific work. They are not taxed, and they don’t generate profit. There is no dividend to be distributed. They generate enough money for the cause of helping people and paying wages and salary.
A professional corporation is that corporation which provides services. In return, they get paid, and revenue is generated. Services can be of any type. For example, a doctor, teachers, architects, professionals, etc.
The owners of the shareholders are somewhat the owners of the corporations, but they are not responsible for anything. They just hold their common stock and get their profit. They don’t have rights to make decisions for the corporations.
A corporation can have only one shareholder or more. Public corporations have thousands of shareholders. Well, known businesses are mostly corporations. E.g., the coca cola company is a corporation, Microsoft, Toyota motors, etc. are considered as corporations. In the USA the conventional type of corporation is “C Corporation.”
Similar to other businesses, corporations also have financial statements. The financial statements contain income statements, equity statements, balance sheet and cash flow.
Income statement includes revenue generated from the services or products sell the expenses of the company and the estimated profit or loss.
Expenses are subtracted from the revenue, and the resulted amount is the gain or loss. If it’s positive, it means the company has generated gain, and a negative value indicates a loss.
Equity statement contains total capital or investment, drawings. The total income calculated from the income statement will be added to the capital, and the drawings of the owner are subtracted. The net resulted value is profit or loss.
The balance sheet shows the balance between assets, liabilities, and equity. Assets contain all the things that a business owns account receivables, cash and cash equivalents, and equipment, etc. liabilities include all the debts, interest payable, account payables and loans, etc. The equation for the balance of assets, liability and stockholder’s equity is
Stockholder’s equity= assets – liabilities
Cash flow statements show all the activities that affected investments, cash, and revenue, etc.