Since a corporation is a separate legal entity, the shareholders are not personally liable for obligations or losses of the corporation. Each shareholder is at risk for the amount paid for his or her stock in the corporation. Creditors of the corporation do not have recourse against the personal assets of the shareholders. This is provided that the corporation is legally established and is operating in accordance with statutory requirements. But if shareholders personally guarantee a loan or other obligation of the corporation, they are legally responsible for the guaranteed obligations. And if shareholders make loans to the corporation, they will generally be repaid after other creditors if the business fails.
Continuity and Transferability
As a separate legal entity, a corporation has its own "life" and can continue to exist beyond the life of any of its shareholders. Normally a corporation’s life is perpetual, but if the shareholders decide to include a duration in the articles of incorporation, or to terminate the corporation at some point, they can do so.
Since the ownership of a corporation is represented by shares of its stock, ownership can be transferred by selling the stock. Also, additional shares can be issued to increase the owners’ equity. Selling newly issued shares will be subject to certain federal or state securities laws. In a closely-held corporation, where the original owners want to maintain control over the business, they may put certain restrictions on the sale of stock to outside parties.
Taxes on Earnings
A corporation’s earnings may be distributed in the form of dividends, or they may be retained and reinvested in the business. The board of directors normally makes the decision regarding dividend distributions. A corporation files its own income tax returns and pays taxes on its net income. The shareholders pay income tax on the dividends they receive. If the corporation’s profits are retained, the shareholders are in effect building up value in the corporation but generally are not subject to tax until profits are distributed.
Shareholders who also work as employees of the corporation receive a salary or wages. This compensation is an expense to the corporation, and taxable income to the shareholder employee.