This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The corporation is quite distinct from the sole proprietorship and the partnership. The capital is supplied by a small or large group of people called shareholders, or stockholders. The business is usually managed by a group of officers and directors elected by the shareholders. The shareholders have no liability for the debts of the corporation beyond the amount which they have contributed as capital. Owing to the possibility of dividing the capital up into shares of comparatively small amount, funds may be raised from the general public by putting these shares on the market; and it is much easier to finance a business of great magnitude in this way than through either individual ownership or through a partnership, in which there are necessarily only a limited number of people.
The business is thus managed by only a part of the people who supply the capital. The corporation itself is regarded as a distinct and separate entity, capable of doing business by itself; the corporation may sue, may be sued by, and may contract with its own members, as well as with outsiders. The officers and directors conduct these operations in the corporate name.
The corporate form is used for social and governmental, as well as for business, organizations. Towns, villages, and cities are conducted as corporations. Corporations for governmental purposes are called public corporations; corporations for business and social purposes, private corporations.
Religious, educational, charitable, and social organizations are usually incorporated without capital stock and are known as membership corporations. When corporate action is taken, each member has one vote and no more. Mutual insurance companies and stock exchanges are among the more important of the non-stock corporations.
All corporations to conduct business for profit have a capital stock divided into shares, usually of like amount, which are evidenced by transferable certificates of stock. The holders of these certificates are termed stockholders. Each share of stock usually entitles its owner to one vote in stockholders' meetings, and a majority of the shares elect the directors and control the policy of the company. When profits are to be divided, they are distributed among the stockholders in proportion to the number of shares they own.