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You are here: Home / Small Business FAQ / What is a Corporation?

What is a Corporation?

If you want a definition of a corporation that uses lots of jargon and fancy language, you can look at the Wikipedia definition for “corporation.” But I want to take a little different approach here.

I suggest you start your thinking about the “what is a corporation?” question by thinking about how humans are created and thinking about the sorts of things an individual does when he or she runs a business and makes investments. (Don’t worry, this discussion will all be “PG”.)

To start, think about how a baby gets created (in general terms). There’s some stuff that happens between the mom and the dad, then there’s a waiting period when people know the baby is coming and anxiously await the new bundle of joy, and then the baby is born. And this real new person, this new human being can start doing stuff.

In many states, laws limit what a baby or young child can do. But at some point, the person (perhaps after reaching a certain age) can do the sorts of things a business does. The human can enter into contracts, hire and fire people, buy and resell inventory, own property, and so forth.

Now let’s get back to the subject of corporations after the brief foray into the birds and the bees. In essence, a corporation is a fake person that the state creates when someone files a piece of paper with the appropriate state office. In other words, rather than a couple of human beings procreating and then waiting a few months (the process for a human person), some nice state employee shuffles some paperwork and makes you wait a few days.

In other words, if you send the right piece of paper (usually a simple form) to the right state office (usually a department in the Secretary of State’s office) with payment, the state says, “Bingo. In this state, there’s now a new person.” And at this point, the new “corporate” person can do stuff like enter into contracts, hire and fire employees, buy and resell inventory, own property and so on.

Note: You know that when you’re talking about a human being, the official documentation for the new person’s arrival is a birth certificate signed by the doctor who delivered the baby. Corporations often have a similar document–the certificate of incorporation (which is often just a copy of the form you file with the secretary of state after it’s been stamped “approved.”)

By the way, the fact that it’s your corporation doing stuff (like entering into contracts) is really significant. If you promise in some contract to rent property and then break the contract, the person renting you the property can come after you for the rent. If your corporation promises in some contract to rent property and then the corporation breaks the contract, the landlord can go after the corporation but (typically) not you.

Summing up, the separate identity of the corporation limits liability. Another way to say this is, if you own part or even all of a corporation, you aren’t personally liable for the debts or liabilities of the corporation merely by virtue of your ownership.

Note: If you own a sole proprietorship business or are a partner in general partnership, you are personally liable. In other words, with sole proprietorships and general partnerships, an owner is personally liable merely by virtue of ownership.

By the way, let me, since we’ve used the analogy of a baby being born, note that, just like a human person, a corporation’s life can terminate. If a corporation files the appropriate paperwork with the state (and sometimes if the corporation fails to do stuff required by law), the corporation’s life can be terminated.

Note: The death certificate, so to speak, for a corporation is a certificate of dissolution. In many states, you can file articles of dissolution (a simple form) with the secretary of state. That form, when stamped approved, becomes your corporation’s certificate of dissolution.

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