Last Updated on July 11, 2023 By Emma W. Thomas
Corporate business refers to a type of organization or entity that operates as a legally recognized and separate entity from its owners or shareholders. It is characterized by having a formal structure, governance, and the ability to enter into contracts, incur debts and engage in various business activities. A corporate business typically aims to generate profit, and its ownership is divided among shareholders who hold shares of the company.
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!
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How does a Corporation Business work?
A corporate business operates through a structured framework that involves several key components and processes:
- Formation: A corporate business is formed by complying with legal requirements, such as registering with the appropriate government authorities and drafting articles of incorporation or similar documents.
- Ownership Structure: The business is owned by shareholders who hold shares representing their ownership interests. Shareholders invest capital into the company and, in return, become entitled to certain rights and benefits, such as voting rights and dividends.
- Governance: Corporate businesses have a governance structure that includes a board of directors elected by shareholders. The board oversees strategic decisions, appoints executives, and ensures compliance with laws and regulations.
- Management: Executives, such as a CEO or president, are responsible for day-to-day operations and implementing the strategic direction set by the board. They manage employees, make operational decisions, and work towards achieving the company’s objectives.
- Business Activities: A corporate business engages in various activities to generate revenue and profits. This includes producing or providing goods and services, marketing and sales, financial management, and human resources management.
- Contracts and Obligations: The corporate business can enter into contracts, agreements, and partnerships with other entities, customers, suppliers, and stakeholders. These contracts define the rights, obligations, and terms of the business relationships.
- Compliance and Reporting: Corporate businesses must comply with applicable laws, regulations, and reporting requirements. This includes financial reporting, tax obligations, and adherence to industry-specific regulations.
- Capital Structure: Corporate businesses can raise capital by issuing shares to investors, borrowing funds through loans or issuing corporate bonds, or generating internal funds through profits.
- Liability and Legal Protection: One significant characteristic of a corporate business is limited liability. The liability of shareholders is typically limited to their investment in the company, protecting their personal assets from business debts or legal actions.
- Growth and Expansion: Corporate businesses often seek growth and expansion through various strategies, such as mergers and acquisitions, diversification, entering new markets, or launching new products or services.
It is important to note that the specific workings of a corporate business may vary depending on factors such as the industry, jurisdiction, and size of the company. Professional advice from legal, financial, and business experts is recommended for establishing and operating a corporate business effectively.
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 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 its 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 the 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 a 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.
Emma is a graduate of Domestic Science or Family and Consumer Sciences (Home Economics) from the University of Wisconsin. She has 7 years of experience Working with the strategic section of BestBuy and now writing full-time for Homeeon.
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