A corporate business is a legal entity. Its liabilities, actions, and debts are separate from those of its shareholders. A group of officials or a board of directors run and manage the business. To incorporate your business, you must file articles of incorporation.
Different regulations apply in each state for incorporation. It is necessary to be familiar with the requirements in your state.
This article highlights the different forms of corporate businesses and their features. It also looks at the steps to form a corporation, how it works, and the pros and cons of forming a corporation. Read on!
How does a corporation work?
Corporations protect the shareholders’ assets from any liabilities arising from their operations. A corporation can engage in any legal action to help run its business. It can hire workers, get assets, sign contracts, or take loans. It can also sue other businesses and be sued for any offenses.
The shareholders appoint a board of directors to oversee its operations and management. The board of directors selects a team of officials to help the business’s day-to-day functions. You can become a shareholder by buying shares. Your number of shares dictates how much or the percentage of the company you own.
An organization sells shares to individuals for continuity. Doing this makes it easy to transfer ownership.
What are the requirements for forming a corporation?
A company or a business chooses a corporate structure to protect the owners’ assets. Different state governments recognize corporations as separate entities from the founders. Both small and large businesses may file for a corporate business structure.
Before engaging in forming a corporation, it is wise to hire an experienced attorney. An attorney understands the laws governing different states and will help you through.
The following steps are helpful in the formation of a corporation;
1. Selection of a suitable business name
It is a legal need that every corporation ought to have a unique and valid business name. The first step is to come up with a suitable name that no other firm holds. Your name should be distinct and align with the business’s operations. It should hint at the goods and services you offer.
2. Filing of articles of incorporation
Articles of incorporation are also known as a charter or certificates of formation. In most states, you must file this document with a government body. You will file them in the state where you will do the business. Doing this is a legal step to ensure that you have documented the creation of your corporation.
3. Designing the corporate bylaws
A corporation or business cannot run well unless it has rules. Writing up the bylaws is very crucial to help in the daily operations. These bylaws will guide the board of directors in carrying out their responsibilities.
4. Appointing the corporation’s board of directors
A corporation cannot run without a board of directors to oversee its operations. It is crucial to appoint this team and state their responsibilities. The board of directors may select a smaller team of officials to help with daily operations.
5. Holding the first board of directors meeting and maintaining the minutes
The appointed board of directors needs to hold their first meeting. In this meeting, they will agree on the running and operations of the corporation. The team can decide on how to get assets, hire workers, and compensate shareholders.
Maintain the corporate minutes to help formalize all the appointments and other decisions. These minutes will formalize the decision to choose a tax status. You can also open and handle a bank account and get a federal identification number.
6. Issuance of shares of stock
While it may not be mandatory, you can issue the first shares of stock to the management (board of directors). Be sure to update the shares’ ledger to help track all shareholders and what they own.
7. Preparation for taxes and regulation
It is necessary to be familiar with tax rules in your state and interact with government entities. Such entities include Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS). Be sure to record any audits and observe all corporate tax regulations.
8. Get the necessary permits and licenses.
Find out the necessary licenses and permits for running your kind of corporation. Some corporations may need you to get licensing from both the local agency and the state. Make sure you are familiar with all the requirements.
After you have done all the above, it is time to kick start the functions of your business.
What are the different forms of corporations?
Different types of corporations exist. There is a need to understand them before deciding what suits you better. This table is a summary of these corporations and their different features.
|Type of corporation||Distinctive features|
|A C corporation (also called C-corporation or C corp)||In this corporation, the government taxes its assets separately from those of its shareholders|
|Multination corporation||They have a global reach and operate in different countries.|
|Nonprofit corporation||These corporations provide services to society without making profits. They are not liable to tax by the government.|
|The municipal corporation (local government)||In this type of corporation, a city operates as a legal entity, and the public chooses its directors.|
|Conglomerates||These corporations own and operate other subsidiaries.|
|S corporations (S corp or subchapter S )||In this structure, smaller firms file as S corp to avoid paying corporate taxes. Their shareholders pay individual income taxes to account for the companies’ earnings.|
|Public corporations||This is a corporation that a state owns and operates. It can also issue stocks to enable the public to invest.|
What are the advantages of forming corporations?
Forming a corporation has several benefits, including;
One of the main benefits of corporations is their limited liability status. The shareholders or owners of the company are sure of protecting their assets. You only become responsible for the amount you invest in the company. You cannot lose your personal property due to the firm’s unpaid debts.
A corporation is credible.
Most potential partners, investors, or even employees have more trust in a corporation. No one wants to risk their investment where there is no protection. You can register your business as a corporation to attract more customers and make it possible to sell stock. Doing this helps the business raise more capital and ensure its longevity.
Numerous tax benefits
A corporation has many tax advantages. For example, when you pay for your health insurance premiums, you get a tax deduction. A corporate income is not subject to paying for social security. You will not pay Workers’ compensation taxes and Medicare. All this helps make some savings.
Ownership is transferable
Another significant benefit of corporations is that their ownership is transferable. Corporations have unlimited life. You can sell or transfer your shares without affecting the company’s activities. The business will continue to run even when an owner or a director passes away.
Does forming a corporation have any downsides?
Yes. Forming a corporation has many benefits, but it also has a few disadvantages, including;
i. It is costly
Depending on the state where you register your corporation, it can cost you a few to several dollars. You will pay for filing fees and business permits & licenses. These fees make it more costly than other business structures like a sole proprietorship.
ii. It involves a lot of paperwork.
The administration duties in a corporation involve a lot of paperwork. You may need to file yearly reports and similar documents to comply with regulations. You will need files containing corporate minutes, bylaws, and a certificate of incorporation. You may also need the certificate of good standing if the corporation operates in another state.
What are the differences between a corporation and a company?
A company is a business, whereas a corporation is a business entity. In a company, business partners or individuals come together to perform commercial activities. In a corporation, the owner’s assets are different from those of the business. A company may operate as a partnership, sole proprietorship, corporation, or LLC (limited liability company.
Key insights and takeaways
A corporate business is a legal entity with limited liability protection. Its shareholders’ assets enjoy protection since they are separate from the business’s. A board of directors oversees all business functions. In other businesses, the individuals are in charge.
Various types of corporations exist, and it is necessary to understand them. You can look at the rules and regulations of your state to know which type suits your needs. You will also need to understand the steps outlined above to help you with the formation of a corporation.