Understanding just what a corporation is can be a challenge. We often think of corporations in our minds as these massive businesses with complicated structures but that is not always the case.
In this guide, we will walk you through just what a corporation and break it down for you with all of the various details that are specific to corporations when it comes to understanding this business structure.
What is a Corporation?
A corporation is defined as a legal entity that is wholly separate from its owners. This is a differentiating factor between entities like the sole proprietorship or partnership in which the business is directly attached to the owner of the business.
In a corporation, the corporation itself has both rights and responsibilities, much like individuals do. Corporations can enter contracts, hire employees, lend and borrow money, sue or be sued, own assets in the corporation’s name, and pay taxes. In these events, everything is transacted under the corporation name and not under a specific individual attached to the corporation.
How Corporations Work
A corporation can have one shareholder or multiple shareholders, again depending on how the corporation is structured. The various shareholders might hold equal percentages or they might hold random percentages to complete total ownership.
Let’s take a closer look at how a corporation works overall.
What is the Process Like to Start a Corporation?
In order to form a corporation, there are two steps to getting started.
- File Articles of Incorporation
- Adopt Bylaws, Organization Minutes, etc.
A corporation is designed to be a profitable business at times. Each state does have different requirements as to what corporations in that state must file in order to be established. Some states do not require bylaws and similar documents but we recommend having them in place for the organization of your corporation and the structure.
File Articles of Incorporation
To establish the corporation, file articles of incorporation through the state in which you intend to become incorporated. Your name will need to be unique to the state. This is typically a simple process and in some states, it can even be completed online.
Before a corporation can begin operating, a board of directors must be established. It is the responsibility of the board to review and manage the overall operations of the corporation and often to make decisions as well. The board members are typically elected through a process using the shareholders and it is the task of the board to represent the best interest of the shareholders and the corporation.
Adopt Bylaws and More
Once the board and shareholders are established, the board should adopt bylaws for the corporation. The bylaws are primarily a breakdown of how the governing within the organization will work.
The bylaws should detail the responsibilities and expectations of the primary office, directors, and shareholders of the corporation.
Do You Need Help Starting a Corporation?
While it is totally possible for you to form a corporation with absolutely no assistance, it is better to seek assistance to do so. There can be a lot of complexity to establishing a corporation and making sure that all of the legal aspects and requirements are handled appropriately.
Corporations have a responsibility to maintain and there are so many options for corporate structure. You certainly don’t want to miss a step or fail to complete a step properly and then find you or your corporation facing a significant liability when you could bring in assistance with the professional background and knowledge to support you in the process.
Why Would Someone Want to Start a Corporation?
When properly established, a corporation is a great way to protect yourself from personal liability. The corporation becomes its own entity and it will be separate from the individuals who establish the corporation initially.
Here are some of the primary benefits of starting a corporation.
- Limited Liability
A corporation has a more professional appearance often. There is so much fraud and uncertainty that people often look for these factors as a sense of security. Having a corporate title of some sort is more official and professional in the business industry.
There are certain tax benefits to owning a corporation. These benefits include the fact that the tax liability of the corporation is inherent to the corporation alone and does not pass through to the board or shareholders.
Corporations have a limited liability protection for shareholders, owners, board members, and employees. Since the corporation is its own entity, liabilities of the corporation do not flow through to participating parties. They are withheld to the corporation alone.
Finally, a corporation can be formed anonymously, which provides some semblance of privacy and protection for an associated individual’s name.
Different Types of Corporations
There are 3 primary types of corporations.
An S-Corp is similar to a C-Corp but the owner limitations and tax differentiations are slightly different. An S-Corp can have a maximum of 100 shareholders and the profits and losses of the business flow through to the shareholders, similar to that of an LLC.
A C-Corp is the most common type of corporation and is what most people know of when the term corporation is used. In this type of corporation, shareholders (owners) can receive profits of the corporation and they are taxed for those profits. At the same time, the corporation is taxed as its own business entity.
A non-profit corporation is much like it sounds. These are typically educational institutions, charitable organizations, and religious affiliations. There are other categories but these are the most common. These corporations do not generate significant profits and they are exempt from taxation. When revenue and donations are received, they are typically appropriated towards the bottom line and used to uphold the operations of the non-profit or make plans for the future.
Advantages of a Corporation
A corporation does offer some advantages. While it not the perfect solution for all businesses, here are some of the possible advantages for utilizing a corporation business structure.
- A corporation is a separate legal entity from the owners and shareholders
- A corporation allows limited liability to owners, protecting personal assets
- A corporation is attractive to investors, more so than individual ownership
- A corporation has unlimited life that is not related to the life span of shareholders, members, and owners.
- A corporation allows for simple transfer of ownership for the shares of the corporation, particularly in the case of corporations which are publicly held.
Disadvantages of a Corporation
Just as there are advantages, there can also be some disadvantages to a corporation. Here are a few.
- If you compare to an LLC, maintenance is more complex and has additional requirements for filings.
- If you consider that shareholders might be taxed for profits and then the corporations itself is taxed, this is double taxation.
- Reporting requirements for a corporation are fairly stringent. There are state, investor, and IRS reporting requirements that must be followed and can cause the corporation to no longer be a corporation if not complete properly.
- The costs of becoming a corporation can be substantial compared to some other business structures.
Should You Start a Corporation?
A corporation is not the best solution for every business but it can be a good solution for many businesses. Corporations are ideal for an owner or group of owners who want the ability to protect themselves from personal liability.
Corporations are their own entity and therefore become reliable and responsible in an individual manner. The benefit is the ability to have business security and continued practices even if something were to happen with an owner.