A corporation is an organization formed with the state government, also sometimes referred to as "C Corporations." The corporation acts as a separate, artificial person that carries on business and other activities. A corporation can get sued, issue shares of stock to raise funds, and incurs double taxation (once through the corporation and the second time through the shareholders). The corporation has many filing and operating requirements that should be known and minded through business operation.
The following are just a few of the advantages and disadvantages to choosing this corporate business entity and other pertinent information you should know about your corporation formation and entity structure.
Liability Shielding: One advantage to the corporation is that its liability for damages or debts is limited to its assets. That means the shareholders and officers are protected from personal claims, unless they commit fraud or commingle their assets. Committing fraud is notoriously a vice – and anyone forming a corporation should know and understand their fiduciary duties before undertaking this entity structure. It is also very important not to commingle business and personal assets. Corporations lose their corporate "veil" (or shield) when they comingle assets. Piercing the corporate veil allows officers and shareholders to get sued personally for claims.
Corporate Ownership is Easily Transferable: Corporate ownership is easily transferable – with the transfer of shares. Transferring shares can be as simple as endorsing the back of a share certificate. However, make sure you follow the governing legislation to make sure all requirements are met when transferring shares.
Corporate Perpetual Existence: Since a corporation is a separate legal entity from its shareholders, the corporation can have continuous existence. It continues as a corporation in law even if the ownership of the corporation itself changes.
Double Taxation: The double taxation system the corporation uses is one disadvantage. Double taxation is the taxation of the same property (income taxes in this instance) for the same purpose twice in one year. Corporations incur double taxation; corporations pay taxes on their annual earnings and also on dividend payouts to shareholders. This occurs and is legal because corporations are considered separate legal entities from its shareholders. An alternative to this double taxation process is incorporating as an S Corporation. S Corporations have their own set of advantages and disadvantages, which can be seen by going to the following link:
Paperwork and Corporate Due Diligence: As a corporation, you're required to file certain documents with the state including; Articles of Incorporation, corporate bylaws "or laws", corporate minutes, certificates of good standing, and other paperwork on a regular basis. You're required to file corporate amendments and keep a more extensive ongoing record of your corporate activities. The corporation may not be the right entity for you if this sounds exhausting and overwhelming.
No personal ownership or control: If your business is your true passion and you want to control over business operations – then a large publicly traded corporation may not be for you. You may look into a smaller closely held corporation, or even a partnership or a limited liability company. Large corporations have multiple control levels in its structure including a board of directors, which some states don't allow family members to be on, and shareholders who oversee the corporation's business activities.
In the extreme circumstance, your large corporation's board of directors or shareholders may elect to oust you from the company altogether. While this an unlikely event, and usually requires some bad doing on your part, the possibility is there in poorly structured corporations (which is why advising with an attorney to help with the formation and structure is highly recommended).
While most states have similar formation procedures, this information should be looked up specifically for whatever state you form your corporation in.
In general, to form a corporation you will need the following:
A corporate name that hasn't been taken by another corporation. Your name
must contain one of the following endings:
- Articles of incorporation filed with the proper state department
- Corporate purpose
- Information for the Board of Directors
- Stock issuance information/requirements
- An office location
- A corporate registered agent and office location for that agent
- Shareholder preemptive rights
There are a few other things you may need in addition to these, such as corporate by laws, corporate agreements and so forth, but they do not need to be filed with the state.
Operating Formalities Summary
- By Laws: These are the laws of the corporation and are drafted by the founders or directors. Corporate bylaws vary but may govern how the Board is elected, meeting requirements, quorum for voting, officer's duties and other aspects of corporate operations.
- Funds: Do not commingle your corporate funds with your personal funds – this can raise grounds to take away your corporate limited liability protection.
- Meetings: A corporation must maintain an accurate account of all meetings by the board or special meetings held by shareholders. The corporate board must also meet at least once a year.
- Agreements: Contractual agreements on behalf of the corporation must be in writing and authorized by the Board of Directors. This includes all financially binding agreements such as loans, lines of credit and other major financial business agreements.
- Fiduciary Duty: Officers and Directors are in a position of trust and therefore are scrutinized even further than other corporate members. They have the fiduciary duty to act in the best interest of the corporation at all times (and not in their own self-interest).
Terminating a corporation can occur voluntarily or forcibly by the state. Voluntarily, the dissolution of a corporation involves passing a resolution at a corporate meeting, paying all debts, distributing assets and filing proper dissolution documents. The state may also force dissolution for not paying taxes or some other action by the government.
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