A corporation is a legal structure that is a separate and distinct person from its owners (called stockholders or shareholders), is taxed as a separate legal person and has its own liabilities and obligations separate and distinct from its owners. It is the most common form of entity used for Silicon Valley technology companies. Corporations are formed under state law (not U.S. federal law), and most Silicon Valley technology companies are formed as Delaware corporations. Nearly all publicly traded companies in the U.S. are corporations and more than 50% of such companies are Delaware corporations (and more than 63% of Fortune 500 companies). Unless stockholders of a corporation commingle their funds with the corporation’s funds or other uncommon reasons, such stockholders are generally at risk for only their investments in the corporation and not the liabilities and the obligations of the corporation. If, however, the corporation is operated as an extension of the stockholders, the stockholders may be liable for all corporate debts. This is why it is important to respect the corporate formalities and operate a corporation as a separate entity.

A corporation is governed by a board of directors elected by its stockholders. The board of directors appoints the officers that run the corporation’s day to day matters.Taxation of corporations is commonly referred to in media as double taxation because profits are taxed at the corporation level and then taxed again when the net profit amounts are distributed to the corporation’s stockholders as dividends. This is one of the primary disadvantages of corporations and why many corporations used for early stage companies make subchapter “S” elections (see the “S Corporation”).

Corporations may have multiple classes of stock called Common Stock and Preferred Stock. For technology companies, Common Stock is usually held by founders and employees who exercise stock options and Preferred Stock is purchased by investors for a price higher than the Common Stock. Preferred Stock is further subdivided into series of stock, such as Series Seed Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, etc.