A corporation is a legal body governed by a board of directors and owned by shareholders.
Corporations have many of the same rights as people. They have the ability to own property, engage into contracts, borrow and lend money, and sue and be sued.
Corporations are formed by small enterprises to attract investors and give limited liability protection.
In our What Is a Corporation tutorial, you can learn more about creating a corporation for your small company or startup.
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When Should a Small Business Form a Corporation?
To safeguard their personal assets, most small company owners should establish a distinct legal corporation. Without limited liability protection, a company owner might be held personally accountable in the case of a lawsuit or bankruptcy.
Corporations are a great option for small firms and startups that depend on investors. Investors prefer corporations because corporate profits are taxed differently than LLC profits.
Why Do Corporations Draw Investors?
Corporations entice investors because they only pay taxes on distributions (dividends) received from the business.
Even if the investor did not get a payout from an LLC, they would be taxed on their percentage of the income (based on ownership interest).
LLCs may also provide difficulties for investors when it comes to transferring their interests in the LLC. This is made easier by corporate shares.
When Should a Small Business Use an LLC?
LLCs are ideal for small enterprises that want a straightforward, low-cost method of obtaining limited liability protection. Corporations can be difficult to manage and operate, so unless a small business needs to attract investors, it should form an LLC.
Understanding Businesses
A company has characteristics that distinguish it from other legal organisations.
A corporation possesses:
shareholders and shares (in most instances)
a council of directors (board members)
bylaws
Corporate tax rate of 21% or S corporation
tax alternatives
intricate operating norms and regulations
Shares and their owners
A share of stock is a corporation’s unit of ownership. Each share of stock reflects a proportion of the company’s ownership. If a business issues one share of stock, the shareholder (stock owner) owns 100% of the corporation.
Shares may be divided into classes. Each class, known as a share class, has unique rights and advantages. A company may have many classes, each with an unlimited number of shares.
Authorized Shares: the quantity of shares that a company may issue.
Shares Issued: the total number of shares issued to shareholders.
Share Class: a group of shares with distinct rights and advantages.
Directors’ Meeting
When a company is founded, the number of directors necessary by the state must be appointed until the first shareholders’ meeting.
A corporate director is in charge of operational bylaw adoption, modification, and repeal, as well as the election, monitoring, and removal of officers.
Following the incorporation of the company, the incorporator(s) — or initial director(s), if listed on the formation papers — shall convene an organisational meeting.
During this inaugural meeting, either the incorporator(s) or the initial director(s) will formally elect the board of directors.
Bylaws
Bylaws are the regulations that regulate and control how an organisation is governed and operated. Bylaws are similar to a corporation’s constitution. It clarifies the norms and priorities for all parties involved.
TIP: Bylaws templates are available to assist company owners in forming organisations.
The bylaws of a company will augment any regulations established by the federal government or the state.
Corporate bylaws should contain the following:
The governance of the company, including the roles of directors and officials
Meeting processes, voting procedures, and the election of executives or directors
How will records be preserved and managed?
How will legal paperwork be carried out?
How will disagreements be resolved?
How will bylaws be added/modified in the future?
The annual shareholders’ meeting date
Contract Negotiation Techniques
Who will submit yearly reports?
How will the firm issue stock?
Fiduciary responsibilities to the company (i.e. acting in the best interests of the corporation)
What is a quorum for voting purposes?
How the corporation’s day-to-day activities will be carried out
What exactly is a quorum? A quorum is the minimal number of members of an assembly that must be present at a meeting in order for the meeting or any votes taken within to be legitimate.
Corporate Income Taxes
A business pays federal corporate taxes at the current rate of 21%. Dividends received by a corporation’s owner must be taxed.
Taxation twice
Dividends are paid out by corporations to their shareholders from their earnings. Dividends are then subject to personal income taxation for shareholders. Corporations are considered to be “twice taxed” since their earnings have previously been taxed at the corporate level.
Most small company owners form an LLC to benefit from lower taxes.
Ordinary dividends are taxed at the same rate as individual federal income taxes, so the rate will vary based on your income.
A company may be taxed as either a conventional C corporation (C corp) or a S corporation (S corp).
Corporation Types – Tax Options
Corporations are classified into three kinds. Each classification is taxed differently.
A nonprofit corporation is a for-profit entity that is registered as a nonprofit corporation with the state. The nonprofit company may apply to the IRS for tax-exempt status as a 503(c) (c).
A C corporation is a corporation that is taxed by the IRS as a default corporation. This sort of company is presently subject to a 21% profit tax. Dividends provided to shareholders are taxed as well.
A company may choose to be taxed as a S corporation. An S corp tax structure enables the company owner to avoid double taxation while negating the investment advantages provided by corporations. As an LLC, it is better to choose S corp status.
Corporate Regulation
A corporation is a legal body that shields the personal assets of a company owner from the firm’s obligations, creditors, and litigation made against the corporation.
Corporate law governs a corporation’s creation, financing, dissolution, governance, and activities. Corporations are subject to both federal and state laws.
The Securities and Exchange Commission (SEC) of the United States also regulates firms and works to safeguard investors, maintain fair markets, and promote capital creation.
How to Form a Company
Creating and managing a corporation is more difficult than creating an LLC, partnership, or sole proprietorship. To assist with the procedure, we propose engaging a formation service. You may start your own company by forming an initial board of directors, submitting articles of incorporation, and selecting a registered agent.