The Corporation
- what it is and how it works

Most people do not have any clear understanding of what a corporation is, so don't worry if you feel a little "wobbly" on this ground. A corporation is an artificial legal body, created to enjoy rights, benefits, and obligations that are comparable to those of a person, in regards to the law. It exists in and on its own, independently of people's mortality. Thinking of it as imaginary person is a good way to start understanding it.

Corporations are very powerful "persons", yet, because of their imaginary nature, they lack intelligence and will power. These virtues must be supplied by real people, just as caring parents, who support a physically disabled child with all the services it needs in order to function and make valuable use of its phenomenal capacities in other areas.

You might want to view a graphical presentation of a Corporation while you read this.

The link opens a separate window with a drawing in pdf format, so it takes a few seconds to download. You might want to print it out for reference - you do this by using the print icon of the Adobe program (closest to the drawing itself) - not your browser's print icon (on the outer frame of the window).

If you don't have an Acrobat Reader yet, you can download one for free (opens in a new browser window).

You can view a corporation as an artificial "child", who cannot act on its own. It has Directors, who take action of behalf of the child in accordance with legislated rules, pretty much like parents do for their child. The rules vary from country to country and from state/province to state/province, yet in all legislative areas, the corporation "child" has owners (shareholders), who are the true beneficiaries of the "child's" success. The shareholders can be many, also way too many to form any practically useful body of management, so they will elect Directors to take care of the detailed management decisions. At the yearly shareholder meetings, they will also hold these Directors accountable for the results they obtain with the corporation in business, just as we try to hold politicians accountable on election day!

The Directors are typically from 3 to 10 in number and form a "Board of Directors" (or simply "The Board"), which really is an executive committee. In some cases, the number of Directors can go down to becoming just one person - but you have heard of single parents also, right?

Some Directors have special titles. The President of a corporation must, in most jurisdictions, be chosen amongst the Directors, and so must the Secretary. Some corporations have a Chairman of the Board, but many corporations simply assign the duties of chairing the board meetings to the President. The Board will often let the President be responsible for the daily operations, but it may also hire an employee as Chief Executive Officer, General Manager, or whatever other title the Directors might find appropriate.

The corporation "child" can make no decisions on its own - everything has to be decided by the parents (Directors and shareholders) in accordance with strict legal rules that vary from place to place. But the corporation can own assets and carry on business as an independent financial entity, legally separate from both the shareholders and the Directors (except for certain fiduciary responsibilities for the Directors and the invested capital from the shareholders' side - check your local laws about this; Directors are typically personally liable for taxes withheld from employees' salaries and for environmental offences).

The main purposes of establishing corporations are:
  1. It makes shared ownership simple to manage and even trade.

  2. It provides a different basis for taxation, typically much lower than personal taxes, yet also much more complex - and often subject to double taxation.

  3. It reduces the financial risk of the shareholders to their investment - their private belongings are not affected by the corporation's possible financial failure (limited liability).

The shared ownership concept is not important for you in regards to protecting your own wealth. One owner will suffice for the incorporations you need for that.

Taxation is an issue that can become important. In most jurisdictions, corporations are taxed on their profit at a lower rate than private people. But what is given here, is often taken away again when the shareholders are to pay income tax on the dividends they receive from the corporation ("dividends" is the name of the part of the corporation's profit that is distributed amongst the shareholders in accordance with the individual fractions of their ownership). Even though such double taxation of the very same money is unconstitutional in many countries, most governments do it anyway!

The limited liability is very important to understand! It is the ultimate consequence of the corporation being a "separate person" in terms of the law. What it really means, is this: If the corporation cannot pay its bills, and the creditors take legal action to cover their losses, all they can get is what is currently owned by the corporation. They cannot touch the personal assets of the shareholders!

This is why so many health care practitioners (doctors, dentists, chiropractors etc.) incorporate their risky businesses. If they run into a lawsuit (just or not - it can still end up being very expensive!), the maximum they can lose is their business. If this happens, they can incorporate another one (at least in North America) for a few hundred dollars... Even if a previous patient sues them for millions of dollars and wins the case in court, their maximum loss is limited to what the corporation owns - their private property is secure from such litigation. It is the same as if your neighbor goes bankrupt. His creditors cannot seize your property for covering the losses they had out of doing business with him...

If this all makes sense, please continue with:

"What makes an IBC different from other corporations?"