A corporation is a business owned by one or more owners. 1 The owners are known as shareholders. A shareholder owns shares of the corporation. Shares are units of ownership in a corporation. For example, if a corporation has 1,000 shares, there may be three shareholders who own 700 shares, 200 shares, and 100 shares respectively. The number of shares held by a shareholder represents how much of the corporation they own. The first shareholder who owns 700 shares owns 70% of the corporation (700/1,000 = 70%). A corporation can have different types of shares; this topic is discussed in a later chapter.
A corporation’s shares can be privately held or available for public sale. A corporation that sells its shares publicly typically does so on a stock exchange. It is called a publicly accountable enterprise. It may have thousands or millions of shareholders. A corporation that holds its shares privately is known as a private enterprise. Its shares are often held by only one or a few shareholders.
Unlike the proprietorship and partnership, a corporation is a separate legal entity. This means, for example, that from an income tax perspective, a corporation files its own tax return. The owners or shareholders of a corporation are not responsible for the corporation’s debts so have limited liability meaning that the most they can lose is the amount they invested in the corporation. They are not responsible for all the debts of an organization.
In larger corporations, there can be many shareholders. In these cases, shareholders do not manage a corporation but participate indirectly through the election of a Board of Directors. The Board of Directors does not participate in the day-to-day management of the corporation but delegates this responsibility to the officers of the corporation. An example of this delegation of responsibility is illustrated in Figure 1.1.
Shareholders usually meet annually to elect a Board of Directors. The Board of Directors meets regularly to review the corporation’s operations and to set policies for future operations. Unlike shareholders, directors can be held personally liable for the debts of a corporation if a company fails.
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