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Are you considering starting a business?
It’s important to understand what a corporation is and the legal requirements that come with it.
Are corporations a good business structure? Today, I’m going to let you in on a secret: corporations are easy to understand if you’re willing to learn.
Let’s dive into the world of corporations and what they have to offer.
- A corporation is a legal entity that’s separate from its owners.
- The main benefit of making your business a corporation is that it removes personal liability for things like debt and legal issues.
- There are two types of corporations, S corps and C corps, which deal with the corporation’s income tax.
- Corporations must fulfill certain legal requirements such as filing articles of incorporation, holding annual shareholder meetings, and issuing stock to shareholders.
What is a Corporation?
At a basic level, a corporation is a legal entity that’s separate from its owners.
It’s owned by shareholders who make all the major decisions while also being a completely separate entity.
What makes them stand out from other business models is that the shareholders aren’t liable for any debt or legal issues.
Under the law, corporations have a lot of the same rights as an individual. They can loan money, enter contracts, hire employees, pay taxes, and face legal issues.
And even if the shareholders choose to leave, the corporation itself stays relatively intact.
While corporations became more prominent with the rise of global trade in the 20th century, their history goes back centuries.
Before the 17th century, there were numerous not-for-profit corporations, created to help with building hospitals and universities.
Meanwhile, most corporations in the 21st century are for-profit and bring in revenue to the economy and their shareholders.
Types of Corporations
There are two distinct types of corporations: C corps and S corps.
The main difference between the two is the size. A C corporation is a larger entity owned by lots of shareholders.
The downside to a C corp is that they’re technically taxed twice. First, corporate profits get taxed at a business level.
Then, once profit is passed onto the shareholders, they are taxed again as part of their income.
An S corporation is a smaller entity, although it can still have multiple shareholders.
It mostly involves a tax distinction, and the requirement is that S Corps can’t have more than 100 shareholders.
Another difference is that the income from the corporation can be passed directly to shareholders without being taxed.
This makes S corps beneficial for tax purposes.
I guarantee you’ve heard of the following corporations.
- J.P. Morgan Chase
- General Motors
These are all great examples of corporations that have been successful throughout history.
Corporations have a few specific legal requirements they have to meet in order to function.
It’s important to maintain good record-keeping as a corporation. This means that if they face legal issues at any point, they’ll have all the information they need on hand.
Here are the legal requirements of corporations:
- Filing articles of incorporation – Articles of incorporation are documents submitted to the state that outline the creation of a corporation, including its name, structure, and authorized shares. This is important for external purposes.
- Issuing stock to shareholders – Once the articles of incorporation have been filed, the corporation can now distribute its stock to its shareholders. This will allow the company to raise capital.
- Holding annual meetings – Next, the shareholders and directors need to hold annual meetings. These are to oversee the running of the corporation and its future
- Electing the board of directors – The annual meetings are also a time to elect a board of directors who are in charge of senior management and the activities of the company.
Pros and Cons
Liability protection for shareholders
Easy to attract investors
Little to no effect on the business structure if shareholders leave
Easy to raise money by selling ownership shares
Corporations are taxed at a lower rate than personal income
Can benefit employees through medical insurance schemes
Set-up can be hard and expensive
Corporations have to pay federal, state, and sometimes local taxes on their profits
Income gets double-taxed
Stricter legal requirements than other business models
Designed for larger entities
Must hold annual meetings and have a board of directors
How to Form a Corporation
Now that you know all the benefits of corporations, it’s time to get into the nitty-gritty: how to start one yourself.
- Set up your business idea – The first step to forming a corporation is to understand what you want your corporation to be. I’d recommend doing some market research first so you understand your target audience and how your business will fit into it. Next, you’ll need to choose a business structure – and most importantly, a name for your business. Make sure you choose a name that reflects your brand and captures the spirit of your ethos.
- File articles of incorporation with the state – Now that you’ve got your business idea set up, it’s time to make it known to the state. Filing articles of incorporation will establish your business as either a C Corp or an S Corp. The articles of incorporation are legal documents you need to file with your state’s business filing agency. You’ll need to provide information such as the name of your corporation, the location of your corporation, the purpose of it, the class and number of shares, and more.
- Draft corporate bylaws – The corporate bylaws are the rules of your organization. Having a list of bylaws isn’t compulsory for every state, but they’re still beneficial for setting guidelines and processes for the owners to run the business. Corporate bylaws can contain things such as members, purpose of the business, conflict of interest, meetings, how the company will operate, duties and responsibilities of the owners, and the rights of the shareholders’ ownership.
- Appoint officers and list their responsibilities – The next step you’ll need to take is to create a list of who’s responsible for what. You’ll first need to get your shareholders together to assign a board of directors, who are in charge of overseeing organizational strategies, investments, profits, and more.
- Secure licenses and permits – It’s time to make sure you’ve got all the legal aspects of your business in line. This is important for physical businesses such as hospitality or broadcasting venues. It’s always best to check with your state’s website to make sure you have everything accounted for.
- Maintain annual reports and tax requirements – Finally, it’s important to file annual reports on how well your business is doing.
You’ll also need to obtain an EIN (Employer Identification Number) which helps identify the business to the federal government.
This is also important for tax purposes, so make sure you check your business is in line with its legal requirements.
Tip: save yourself time by using a business formation service like LegalZoom.
Congratulations on reaching the end of this article. Now that you’ve got a basic understanding of what a corporation is, it’s important to remember that continuous learning and practice are crucial for mastering any subject.
Keep embracing that curiosity; practice makes perfect.
Is a corporation a good idea?
Starting a corporation is a good idea if you’re looking to grow a business and don’t want to worry about personal liability.
The benefits of a corporation outweigh the disadvantages.
What is the difference between a corporation and an LLC?
The main difference between a corporation and an LLC is that corporations have “shareholders,” while LLCs have “members.”
This allows LLCs to have a simple management structure, with fewer legal requirements such as annual shareholder meetings.
How do corporations raise money?
Corporations can raise money in a few different ways: from early-stage investors, through reinvesting stocks, by borrowing money from banks or bonds, and by selling stock.