A corporation is an entity separate from any of the parties forming it. It consists of shareholders who own the company, directors who make overarching business decisions, and officers which handle the day to day management of the company. The shareholders are essentially investors and are not liable for the debts and liabilities of the company. Their interests are freely transferable and the corporation’s existence is perpetual unless otherwise provided. A corporation is created by the filing of Articles of Incorporation with the State, and the formalities set forth in the statute must be followed.
A corporation is an entity established under state law for conducting business. Such an entity has its own existence separate and apart from its owners. It is made up of three primary groups.
The shareholders are the owners of the company. They have ultimate control but generally make only major decisions that affect the company. Their most important impact on the company is through the election of directors. This is usually done at an annual meeting held for such purposes.
The directors are elected by the shareholders and make the major business decisions that affect the company on a more specific level, such as what direction the company is going to take. The board of directors elect the officers of the company (president, secretary, treasurer, etc.) at an annual meeting.
The officers of the company are employees of the company and manage the day to day affairs of the company under the general direction of the board. They sign the checks, pay the bills, and manage the business operations.
A corporate structure separates ownership and management in the company. In small, closely-held corporations, the same individuals will likely serve as shareholders, directors, and officers. In large, publicly traded corporations, shareholders rarely serve as directors or officers unless they own large blocks of stock.
A corporation is formed by the adoption of Articles of Incorporation. These Articles set out the name of the company, its duration, its registered office and registered agent, and other matters. The individuals creating the corporation are called incorporators and are often the original shareholders of the corporation.
Corporate bylaws establish the management of the corporation. They also set forth the duties of the shareholders, directors, and officers, as well as required meetings and notices.
A corporation, if properly managed and funded, provides protection to the shareholders from the liabilities and obligations of the company. That is, the shareholders risk their investment in the company, but do not place at risk their personal assets. Thus, a shareholder’s personal assets are not subject to the claims of the corporate creditors.
A corporation, however, is taxed as an entity separate and apart from its shareholders. This creates a “double taxation.” That is, the corporation is taxed on its profits at the corporate level, and then dividend distributions to shareholders are taxed again at the shareholder level. This double taxation can be devastating for small businesses.
Recognizing the inequity of double taxation for small businesses, congress created an exception to the double taxation rule. Small business corporations (“S Corporations”), as defined in the code, can make an election (an “S Election”) to have the corporation ignored for federal tax purposes, and have all the income and loss of the corporation flow through to the individual shareholders.
To ensure that this structure is available only to small businesses, limitations are placed on the number and types of shareholders that can hold stock in an S Corporation.
To qualify as an S Corporation there can be no more than 70 shareholders and they can only be individuals or certain types of trusts. Numerous other requirements also apply.
As most small business owners will tell you, the most devastating tax on such owners with modest incomes is the self employment tax. It taxes you at 15.3 percent of your income without any deductions. An S Corporation provides a special planning opportunity for such small business owners.
Corporate dividends are not subject to self employment tax. In a regular C Corporation, a dividend is subject to double taxation. However, dividends from an S Corporation avoid the self employment tax while also avoiding the double taxation. As long as the employee-owner is drawing a reasonable salary, an appropriate amount of dividends can be paid without self employment tax liability. Such amounts are still subject to income tax, however.
Though more formalities are required to maintain the liability protection in a corporation than in limited liability companies, the tax benefits will often outweigh this factor.
A corporation is an entity established under state law for conducting business. It has its own existence separate and apart from its owners. A corporation is made up of three primary groups, the shareholders, the directors, and the officers.
The shareholders are the owners of the company. Their most important impact on the company is through the election of the board of directors. This is done at an annual meeting held for such purposes.
The directors are elected by the shareholders and make major business decisions that effect company policy and direction. They also elect the officers.
The officers of the company include the President (often called the chief operating officer or CEO), any number of Vice Presidents, the Secretary, and Treasurer. The officers are employees of the company and manage its day to day affairs. They sign the checks, pay the bills, hire and fire employees, and manage all of the other day to day business operations.
Filing Articles of Incorporation forms a corporation with the State. These Articles set out the name of the company, its duration, its registered office, registered agent, and other matters. The persons creating the corporation are often the original shareholders of the corporation and are called incorporators.
Corporate laws establish the management of the corporation in broad terms. It also sets out the duties of the shareholders, directors, and officers, as well as required meetings and notices. A great deal of the statutory rules for corporations can be modified within the bylaws of the corporation if desired.
One advantage of the corporate form is its limitation of shareholder liability. Although the shareholder’s investment is at risk, the shareholder’s other assets are shielded from liabilities of the company. If the corporation is properly managed and maintained, the most a shareholder can lose is the amount of the investment in the corporation.
In small closely-held corporations, the same individuals will likely serve as shareholders, directors, and officers. In large, publicly traded corporations, shareholders rarely serve as directors or officers unless they own large blocks of stock.
When we think of C corporations, we generally think of large companies like IBM or General Motors. These companies are classic examples of the “C” corporation. The C corporation is subject to a double taxation. That is, the profits of the corporation are taxed at the corporate level and the corporation pays taxes to the IRS. Then, when the company distributes the profits by paying dividends, the dividends are taxed as income to the individuals who must pay tax to the IRS. This is the chief disadvantage of a C corporation.
A C corporation has many advantages, however. It may have an unlimited number of shareholders and the types of entities that may hold stocks are not limited. This means, for example, one corporation may hold stock of another corporation. Like corporations generally, a C corporation shields the owners from liability. C corporations are excellent vehicles for raising venture capital, though stringent federal guidelines must be followed, including potential filing requirements. Also, fringe benefits to employees are generally tax deductible to the corporation, including 401(k) plans, and health insurance.
Although we have spoken of C corporations as large companies, C corporations do not have to be large. They can have few stockholders who also act as the directors and officers. These are referred to as closely held corporations. They are C corporations but the stock of these companies are not publicly traded and control is kept in relatively few hands. Often, such closely held C corporations will avoid corporate level taxation by distributing all income as salary with no dividends.
The use of the C corporation for small businesses is currently not en vogue. However, for certain growing businesses with specific needs, it can be an attractive business alternative.