What is a corporation?

A corporation is defined as a legal entity that is separate and distinct from its owners, known as shareholders. This fundamental characteristic allows the corporation to enter into contracts, sue or be sued, own assets, and incur liabilities independently of the individuals who own it. This separation provides limited liability protection to the shareholders, meaning they are not personally responsible for the debts and obligations of the corporation beyond their investment in company shares.

This distinguishes corporations from other business structures, such as partnerships and sole proprietorships, where personal liability is more prevalent. While limited liability can exist in partnerships through specific arrangements, it is not a defining characteristic of a partnership. A corporation is distinctly recognized in law as having its own rights and responsibilities.

Understanding the nature of a corporation is essential because it highlights why many entrepreneurs choose this structure for starting a business—primarily to protect personal assets and to facilitate the process of raising capital through the sale of shares. Other structures like sole proprietorships and partnerships do not offer the same level of legal separation and liability protection.