A corporation is a type of business that exists separately from its owners or founders. It is its own entity, is usually owned by shareholders, and managed by a board of directors.
It is possible that the managers and directors of the corporation may be the original founders. However, they don’t have as much direct or long-term control over the company as they would in an LLC or sole proprietorship business.
Read on below to learn more about how and why corporations come into being and the different types of businesses that can be created through incorporation.
Why Do Businesses Incorporate?
The main reason that founders and owners choose to incorporate their businesses is to make them completely separate entities from themselves for liability and tax purposes. The incorporation of a company means that it becomes its own unique tax entity in the eyes of the IRS and state jurisdiction.
This offers the business and its owners many advantages, such as:
- Protecting personal liability: The business is entirely separate from its owners which can provide protection in cases of legal issues and bankruptcy.
- Raising capital quickly: When a business has been incorporated it may usually sell stock publicly to gain extra finances.
- Easier to transfer shares: Because shares are publicly traded, it is much easier to transfer stock and ownership stakes in the business.
- Tax benefits: If the business is an S corporation it gains special tax advantages, allowing some income to be taxed at more favorable rates.
How Do Businesses Become Corporations?
In order to become a corporation, business owners must incorporate the business in its home state. This requires the management to submit articles of incorporation to the state government where the company is based and draft corporate bylaws.
These bylaws will be the rules governing how the new corporation shall be run. They must comply with state, local, and federal laws and remain true to the company’s purpose and mission.
Once a company formally becomes a corporation it may issue stock to shareholders publicly. Each share equals a vote in the business and allows stakeholders to vote for the board of directors. There must be an Annual General Meeting (AGM) each year for shareholders to elect the board for the coming twelve months.
What Types of Corporation Exist?
There are a few different options available when setting up a new corporation. These vary depending on the size of the business being incorporated as well as the number of shareholders involved with the entity.
There are three main types of corporations that companies choose to set up.
Most corporations are C corporations, meaning that the business may issue stock publicly and company profit is taxed before it is paid to shareholders, who then must pay tax based on their individual income. Other corporations may also be shareholders of a C corporation.
S corporations are smaller entities with under 100 shareholders which don’t allow other corporations to own stock in the entity. Under this categorization, the business can elect to have tax assessed by individual shareholder income only. This avoids the business being taxed once as an entity and again when shareholders declare their personal income.
Read more: LLC vs S Corp: What’s the Difference?
A non-profit corporation is an entity that exists to provide a service without dedicating its resources to making a profit. They are exempt from tax and normally consist of charitable, religious, and educational organizations.