What is a corporation?
A corporation is a type of business entity separate from its owners. This means that the corporation has its own legal rights and responsibilities, such as entering contracts, hiring employees, and paying taxes. In addition, a corporation can sue or be sued just like any other individual.
A corporation is created by individuals or a group of people with shared goals who want to operate the business for profit. The owners of a corporation are called shareholders, and they have limited liability because they are not personally responsible for the company’s debts. A corporation must adhere to specific state regulations to incorporate and become an official entity.
Once a corporation is established, it functions as an independent business. This means that it can enter into contracts, own assets (such as property or equipment), remit federal and state taxes, and borrow money from financial institutions. Additionally, shares in a corporation are more senior than common stock but are more junior relative to debt instruments such as bonds.
Incorporating gives the business entity a distinct feature that protects its owners from being personally liable in the event of a lawsuit or legal claim-a valuable asset for any company!
Common types of corporations
There are three common types of corporations: C-corporations, S-corporations, and non-profit corporations.
C Corporations are the most prevalent type of business incorporation and feature practically all of the characteristics of a corporation. Profits are distributed to owners, who are taxed individually, while the corporation is taxed as a corporate entity.
S Corporations are formed similarly to C Corporations but have different owner restrictions and tax implications. An S Corporation has up to 100 shareholders and is not taxed separately; instead, the shareholders bear the profits and losses on their personal income tax returns.
Non-profits are often used by philanthropic, educational, and religious institutions to operate without profit, and they are tax-exempt. Contributions, gifts, and earnings are reinvested in the company to be used for operations, expansion, and future endeavors.
How does a corporation work?
Before a company can begin operations, it must elect a board of directors, which shareholders elect at the annual public meeting. Every shareholder is eligible for one vote per share and is not obligated to participate in the corporation’s day-to-day operations. However, shareholders may be elected to the corporation’s board of directors or executive officers.
The board of directors comprises persons elected by shareholders to represent them. They are entrusted with making critical decisions impacting shareholders and developing policies to guide the corporation’s administration and everyday operations.
Corporations need to have a strong board that can make informed decisions on behalf of shareholders and ensures that management acts in their best interests.
Pros and cons of corporations
The main advantage of incorporation is that it provides the business with a level of legal protection. This means that the business is seen as a separate entity from its owners and is, therefore, less likely to be held liable for any debts or legal issues that the business may encounter.
The main disadvantage of incorporation is that it can be expensive to set up and maintain. Another drawback is that two types of taxes are remitted with corporations: on business earnings and on dividend payments to shareholders.
One important thing to keep in mind is that incorporating a business takes time and effort-but it’s not impossible! You’ll need to file Articles of Incorporation with your state government, create bylaws that outline how the company will run, and appoint directors to oversee management. Plus, you’ll need to maintain important documents like tax records, annual reports, licenses, etc.
How to start a corporation
Starting a corporation can be a daunting task. Before making this decision, there are many things to consider, such as what type of company you want to form and what state you wish to incorporate in. Thankfully, there are formation services that can help make the process much easier and less time-consuming.
When starting a corporation, there are several different types of company structures you can choose from – LLCs, partnerships, and sole proprietorships. However, corporations offer more benefits than these other options and are recommended for most businesses.
One important thing to note when forming a corporation is that it is not as simple as registering with your state’s Secretary of State office. You must take specific steps for your business to be considered an official corporation. This includes filing articles of incorporation with the state, electing directors and officers, creating bylaws, and issuing stock certificates.
Here are all the necessary steps:
- Choose a business structure.
- Choose a name for your business.
- File your articles of incorporation.
- Draft bylaws for your corporation.
- Appoint directors and officers.
- Issue stock to your shareholders.
- Get a Federal Employer Identification Number (EIN).
- Register with your state.
- Open a business bank account.
- Start doing business.
Once all of these steps have been completed, your business will be registered as a corporation and will enjoy the many benefits that come with it. These include limited liability protection for owners, perpetual existence and ease of transferability of ownership interests.
The difference between an LLC and a corporation
The primary distinction between an LLC and a corporation is that an LLC is privately held by one or more persons, whereas a corporation is publicly owned.
Whichever organization you select, both provide substantial benefits to your business.
How to dissolve a corporation
A corporation dissolves when it ceases to exist as a separate legal entity. This can happen when the corporation is liquidated, merged into another corporation, or the state dissolves it.
A corporation can dissolve voluntarily or involuntarily. In the case of voluntary dissolution, the company’s shareholders and directors agree to wind up the company’s affairs and terminate its existence. This usually happens when the company is no longer able to carry on its business, or it is in liquidation.
On the other hand, involuntary dissolution happens when a company is unable to pay its debts as they come due. The creditors then file a petition with the court for involuntary dissolution. The court will appoint a trustee who will take control of the company’s assets and sell them off to satisfy the company’s debts.
The proceeds from the sale of assets are first used to pay off creditors. Any money left over is distributed among shareholders according to their percentage ownership in the company.
Should you form a corporation for your small business?
There is no one-size-fits-all answer to this question, as the decision of when to form a corporation for a small business will depend on a variety of factors specific to the company. However, some general things to consider include whether your company plans to raise money from investors, whether it will have employees, and whether it will be doing business in more than one state.
Small business owners should form a separate legal entity to protect their personal assets because of the possibility of lawsuits or bankruptcy. A corporation offers limited liability protection, which means that the shareholders are not personally liable for any debts or obligations of the company. This is especially important if the small business owner operates the business individually and does not have a partner.