A corporation is a legal business entity that stands apart from its owners, known as shareholders. As a result, it can enter into contracts, own assets and incur debt—all on its own, separate from its owner(s).
Choosing to incorporate affects a company’s operational, accounting, tax and legal requirements. It also shields its owners from personal liability in a way that other types of businesses, such as partnerships and sole proprietorships, can’t. A corporation can raise capital by selling shares of stock to investors, and its existence continues even if the owners or directors pass away or withdraw from the business.
The prevailing notion of a corporation’s purpose, in the United States at least, is that it exists to serve its shareholders. Academics describe this as the “shareholder primacy norm.” Corporations are encouraged to produce a favorable image through seemingly selfless corporate acts, and they’re expected to maximize shareholder returns.
This view has been challenged by a number of factors, including rising expectations of corporations’ responsibility for innovation, domestic economic development and environmental and social sustainability. Four years ago, the Business Roundtable (BRT) issued a statement signed by 181 CEOs that reaffirmed their “commitment to an enduring value proposition for employees, customers, communities and shareholders.” The BRT’s statement also acknowledged that corporations have a responsibility to the free-enterprise system, as well as a duty to contribute to social change. This instrumental conception of a corporation’s purpose serves an important function, signaling to those who do business with a corporation the level of accountability it is expected to accept.