For-Profit Corporation Defined
To fully understand what a nonprofit corporation is, it helps to understand what a for-profit corporation is. A corporation, either nonprofit or for-profit, is a unique legal entity recognized by state and federal governments as completely separate from the people who own it. The one exception is the sole proprietor, which will be addressed in the next section. Otherwise, corporations are viewed essentially as though they were people, with many of the same rights and privileges, although technically they only exist on paper.
Corporations as People
If you find this concept a little difficult to understand, you are in good company. The debate over the rights of a corporation as a separate entity has been raging in the United States since before there even was a United States.
The names of many of the earliest corporations are known by every schoolchild: the Massachusetts Bay Company or the Hudson Bay Company. What you may not realize is that these for-profit corporations were chartered by the British government, claiming equal rights and privileges as the people of the colonies!
In the 1886 Santa Clara County v. Southern Pacific Railroad case, the U.S. Supreme Court deemed that a private corporation, Southern Pacific Railroad, was a “natural person” under the Constitution and was therefore entitled to protection under the Bill of Rights. With that decision, which holds to this day, the Supreme Court declared that corporations have the same rights as people.
Since the Southern Pacific Railroad ruling, the Supreme Court has continued to maintain that corporations of almost every type are indeed artificial people with most of the basic rights held by “normal” people, including the right to own property, take on debt, and sue or be sued.
The Five Basic Elements of the For-Profit Corporation
For-profit corporations have five essential components:
They may have “limited liability,” meaning investors in the corporation can only lose (or are only liable for) the amount of money they have invested, rather than potentially losing everything they own.
They maintain a “continuity of existence,” which means that the corporation can literally exist forever or well beyond the lifetimes of the founders or current owners.
They offer an “ease of ownership transfer” through the sale of shares, rather than selling the actual business.
They have the ability to raise money or capital through expanded ownership. In other words, if more shares are sold or more partners are brought in, there is no limit to the amount of money that can be raised — and of course, lost.
They offer shareholders the ability to profit from the growth of the business through increased value of their shares, when shares are sold on the open market, or through the payment of dividends based on the profit the corporation has generated.