A corporation is a legal entity created by individuals or shareholders to operate a business for profit. Corporations have several key features that distinguish them from other business structures, offering both advantages and disadvantages.
Corporations are separate legal entities from their owners, allowing them to enter contracts, own assets, pay taxes, and be held legally liable. At the same time, owners have limited liability, meaning the corporation’s debts and obligations belong to the company, not the owners personally.
In this comprehensive guide, we’ll cover:
- How Corporations Are Formed
- Types of Corporations
- How Corporations Work
- Advantages and Disadvantages of Corporations
- Dissolving a Corporation
How Corporations Are Formed
To form a corporation, articles of incorporation must be filed with the state. This legal document names the entity and its owners and establishes key details like:
- Business purpose
- Number and types of stocks issued
Incorporation establishes the corporation as a distinct legal entity, shielding owners from personal liability. Corporations must follow regulations in their state of incorporation and states where they conduct business.
Types of Corporations
There are a few main types of corporations:
The most common type, C corporations pay taxes as a business entity. Owners pay individual income tax on any dividends received. Most large companies are C corporations.
S corporations allow business income and losses to pass to the owners’ personal tax returns. To qualify for S corporation status, companies must meet ownership, capitalization and eligibility requirements.
Non-profits focus on religious, charitable, scientific or educational purposes, rather than generating profits to pay dividends. Their income streams go toward sustaining operations and furthering their mission.
How Do Corporations Work?
Shareholders elect a board of directors to oversee major decisions and set policies, while also selecting corporate officers to manage daily activities.
- The board owes shareholders a duty to act in their best interest.
- Officers oversee executives and employees based on the board’s direction.
Shareholders receive votes equating to the number of shares owned. They are not liable for corporate debts beyond their investment and do not take part in operations.
Advantages and Disadvantages of Corporations
- Limited liability protection
- Ability to raise funds through public stock offerings
- Perpetual existence beyond original owners
- Separate legal entity status
- Higher setup costs
- More complex regulations
- Double taxation of profits
- Public disclosure requirements
Dissolving a Corporation
A corporation can be dissolved by:
- A vote to dissolve by shareholders
- Failing to meet regulatory requirements
- Declaring bankruptcy
A government-approved liquidator sells off assets to pay creditors, then distributes any surplus to shareholders. Involuntary liquidation can occur if creditors force dissolution due to insolvency.
In conclusion, corporations represent a complex yet dynamic business structure that offers unique benefits and challenges. They stand out as separate legal entities from their owners, providing limited liability protection and the ability to raise capital through stock offerings.
Corporations come in various forms, including C Corporations, S Corporations, and Non-Profit Corporations, each with distinct tax implications and operational guidelines. While they offer advantages like perpetual existence and the ability to engage in legal activities independently, corporations also face challenges such as higher setup costs, complex regulations, and potential double taxation.
The dissolution of a corporation involves a structured process, often initiated by shareholder vote or regulatory failure, with assets liquidated to settle debts. Understanding the intricacies of corporate structure, from formation to dissolution, is crucial for anyone considering this route for their business endeavors. This guide provides a comprehensive overview, equipping potential owners with the knowledge to navigate the corporate landscape effectively.
Frequently Asked Questions
What are articles of incorporation?
Articles of incorporation are the legal document filed with a state to form a corporation. They establish details like the business purpose, location, ownership structure, and amount of stock authorized.
What happens if a corporation goes bankrupt?
If a corporation declares bankruptcy, a court initiates liquidation proceedings. A trustee sells off assets to pay creditors, then distributes any leftovers to shareholders per ownership stake. Shareholders can lose entire investments.
Can a corporation be owned by one person?
Yes, a single owner can form a corporation, electing themselves the sole shareholder, board director and appointing officers. This provides liability protection with less administrative burden.
Do non-profit corporations pay taxes?
Most non-profits are exempt from income tax. However, they still need to file annual returns and pay payroll and sales taxes. Strict rules prohibit personally benefiting owners and require non-profits to detail how they further their mission.
What is the corporate veil?
The corporate veil refers to the legal separation between a corporation and owners. It shields owners from liability above their investment stake. However, the corporate veil can be “pierced” if a court finds owners used the corporation improperly.