A corporation is essentially an entity that exists separate and apart from its owners. Corporations are required to have at least one owner and owners are called shareholders or stockholders; ownership interests are referred to as stock. Because a corporation exists separate and apart from the owners, the owners are protected from debts and liabilities.
Forming a Corporation
A corporation is established when articles of incorporation are filed with the secretary of state. This document establishes the reason for the enterprise and in some states it is referred to as a certificate of incorporation or a charter. The articles should clearly state the business purpose, but at the same time that description should also allow the business flexibility to grow and evolve. The basic information that should be stated the business' name and address, the name of the incorporators, the intended duration of the business entity (either perpetual or of limited duration) and the purpose of the business.
An incorporator is the responsible individual for filing the articles with the secretary of state. In many states, the incorporator cannot be an owner, officer or director of the business entity. A legal agent is a third party who is not affiliated with the business entity who will be responsible for accepting any legal process papers filed against the business. A legal agent can be a law firm, but there are also professional organizations that perform these duties.
Corporations are also required to have written by-laws. This is the governing document of the business and it establishes the operating procedures for the entity. By-laws describe the management structure and what the roles and responsibilities of the officers and directors will be. Generally, directors are senior executives or managers who are responsible for the day-to-day operations of the business while officers are the individuals appointed to implement the policies and procedures established by the directors. Officers report to the directors who are ultimately accountable to the owners, that is, the shareholders. By-laws should also specify the voting procedures, notice requirements, proxy, and the minimum number of people who must be present for a vote to be effective — this is referred to as a quorum.
Corporations are required to have an annual meeting, but meetings can also be held once every quarter, once a month, or at any time an action is taken that affects the operations of the business. Such action includes mergers, establishing new business ventures and promoting or terminating officers and directors. Minutes, or a written record of the meeting, must be prepared and the actions taken during these meetings are often memorialized in a written resolution. Resolutions, minutes and notices are required to be maintained with the company's books and records along with the articles of incorporation and by-laws.
Types of Corporations
There are two types of corporations: "C" corporations and "S" corporations. The former refers to a business that meets the minimum requirements for the definition of a corporation established by the Internal Revenue Service tax code while the latter is a designation for a business that is established pursuant to subchapter "S" of the code. A subchapter "S" designation allows a business to be taxed like a partnership where the profits and losses are passed through to the shareholders. At the same time, owners are provided with protection from debt liability. Finally to qualify as an "S" corporation there must be one or more, but fewer than seventy-five owners.
On the other hand, a "C" corporation does not have a limit to the number of owners; however, these businesses are not pass-through entities and the corporation's profits are taxed. Because of this, "C" corporations are subject to what has been termed "double taxation." In addition to the profits being taxed, shareholders are taxed on the dividends that are paid on the stock that they own. Further, shareholders are also taxed on any profits they receive on shares of stock that they sell. This is known as a capital gains tax. Finally corporations are required to pay salaries to the directors, officers and employees, who are also required to pay taxes on that income.
Ultimately, the appropriate form of business organization depends on the purpose of the business, the number of people who will have an ownership interest, the amount of profit or revenue that will be generated, and finally the number of people that the business will employ. Finally, the matters discussed in this article are for informational purposes only and should not be construed as financial or legal advice.
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
