A corporation is a business structure created and regulated by state law. It is an independent legal entity, separate from the people who own, control and manage it. Forming and running a corporation requires more than just filing papers. Excellent record keeping is required to handle the corporate tax return, and corporate formalities involving decision-making and record keeping must be followed precisely. There are many different kinds of corporations some of them are: C Corporations, S Corporations, Close Corporations, Professional Corporations, and Non-Profit Corporations.
How Can a Corporation Be Formed?
Some basic things that the individual owners (shareholders) must agree to when forming a corporation are:
- The business name
- The total number of shares to authorize (sell or issue)
- The number of shares of stock each owner will buy
- The amount of money or other property each owner will contribute to buy his or her shares of stock
- The business which the corporation will undertake
- Who will manage the corporation
How Is a Corporation Controlled?
Corporate shareholders typically elect a group of individuals to a board of directors. Shareholders who hold a majority of the shares have ultimate control over the corporation as they have the strongest voting power to elect individuals to the board of directors.
The board of directors make the major corporate decisions and must meet at least once a year. The board elects the officers of the corporation. Day-to-day decisions are made by the officers.
How Is a Corporation Held Liable for Debts?
Creditors of the corporation may look only to the corporation and the business assets for payment; individual shareholders are generally shielded from personal liability for business losses so long as the corporation is properly established and operated. Thus, the shareholders only risk is their investment in the corporation.
Exceptions to Limited Liability
In some circumstances limited liability will not protect an owner's personal assets and an owner of a corporation can be held personally liable if she:
- personally and directly injures someone
- personally guarantees a bank loan or a business debt on which the corporation defaults
- fails to deposit taxes withheld from employees' wages
- does something intentionally fraudulent or illegal that causes harm to the company or to someone else
- treats the corporation as an extension of her personal affairs, rather than as a separate legal entity
In some circumstances courts can rule that a corporation does not exist and that its owners are really doing business as individuals. In these cases, the individual owners are held personally liable for any business obligations that arise. This happens most frequently when there is a failure to follow corporate formalities such as:
- adequately investing in ("capitalizing") the corporation
- formally issuing stock to the initial shareholders
- regularly holding meetings of directors and shareholders
- keeping business records and transactions separate from those of the owners
Continuity and Transferability
A corporation exists for as long as its shareholders decide it should. Ownership is transferred by sale of all or a portion of a shareholder's stock. Thus, owners are added and removed by the direct selling of corporate stock. However, federal and state securities laws may limit certain sales.
Corporations must deal with double taxation. That is, while a corporation (must file its own tax return and pay taxes on its profits, the dividends paid to shareholders are also taxed to each individual shareholder. Additionally, the corporation must report all income it receives and can deduct business expenses. Shareholders, on the other hand, cannot deduct any corporate losses.