Corporations are the most common type of business entity in the U.S. They offer maximum growth potential over other business entities because they can sell stocks to attract investors.Reading Time: 3 minutes
A corporation (often called a C-Corp or S-Corp) is a type of corporate entity whereby the owners (a group of people called shareholders) are authorized to act as a single entity (legally a person) and recognized as such in law. Corporations continue to remain very popular, even with the increase in the popularity of LLC’s, because of the prestige, flexibility, liability protection and tax treatment that corporations provide. Only a corporation (C-Corp in particular) can ever become a public company and publicly traded.
C-Corporations are the only entity type that may be publicly traded, and thus if you intend to “IPO” someday, a C-Corporation may be a wise choice.
S-Corporations are considered “pass-through” entities, where the profits and losses pass through to the owners, on a pro-rata basis according to ownership. There are limitations on the number of shareholders and who can own an S-Corp. It is possible to save from paying self-employment tax with an S-Corp, although the IRS does require the business to pay the owner-employees a “reasonable salary” before distributing profits (or losses). Tax savings generally occurs for larger corporate incomes.
There are many reasons businesses choose to incorporate.
Formally incorporating your business may help it “look more professional and establish credibility.”
C-Corporations may be publicly traded with no limit on the classes of stock, or the number and type of shareholders.
Both C-Corporations and S-Corporations generally permit greater flexibility in tax deductions, than operating as a partnership or sole proprietorship.
Corporations act as a single entity, and the entity itself is what is liable to third-parties for disputes. This acts as a shield to protect the shareholders from the liabilities of the corporation.
Corporations outlast the shareholders, which means a corporation is an excellent way to create a legacy for your family.
C-Corporations are their own taxable entities, and as such, are taxed very much like a person (although they have their own tax rules and rates). S-Corporations are “pass-through” entities, and its profits and losses are apportioned amongst the shareholders according to ownership or their capital accounts.
Corporations are governed by a Bylaws and a Board of Directors. S-Corporation can benefit from a Partnership Agreement, although it is not required. Bylaws are relatively straightforward and control how the corporation is managed, how the corporation can be dissolved, how it adds new shareholders, how existing shareholders can be removed or resign, and many other issues about the corporation. State law requires Bylaws, and if you have one or more partners, you should strongly consider a Partnership Agreement (or Buy/Sell Agreement) to help address issues outside of the typical Bylaws (for example, do you want right of first refusal to buy your partner’s shares, if he or she leaves, dies or becomes incapacitated?).
A corporation requires that the Articles of Incorporation be submitted to the state where formed and indicate many aspects of the corporation, including the registered agent; number, class and par value of shares; physical mailing address; incorporator; and initial board of directors. Once the State approves the Articles, the corporation is said to exist.
In order to form a corporation, the corporation must authorize shares. Authorized shares simply defines how many shares of the corporation exist. A corporation then issues those shares to shareholders. Shares held by shareholders are called “Issued Shares.”
Every corporation requires a board of directors, which is authorized and empowered by the Bylaws. The board of directors is responsible for important decisions, such as hiring officers, defining salaries and more.
A corporation must have a stated business purpose, and most states require more than simply “any lawful purpose.”
A “registered agent” is someone located in the state where the corporation is formed and/or registered, and is responsible for forwarding on legal notices to the board of directors. A “physical mailing address” is the primary location where the corporation is located and may be located outside the state where the corporation is formed.
Corporations have a board of directors that consists of at least two people. The board of directors hires officers who run the day-to-day activities of the corporation.
All you need to do is fill out our easy “Corporate Formation Questionnaire” to get started. Our questionnaire is easy to fill out and helps us understand your specific requirements. Licensed business attorneys are available to help you and answer questions.