Corporation

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.

These benefits make incorporation an attractive option for businesses looking to protect their assets, optimize their tax situation, and ensure long-term stability.

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.

Steps to Incorporate

Incorporation involves several key steps:

• Decide on the type of corporation (e.g., C Corporation, S Corporation).
• Create corporate bylaws to govern the corporation's operations.
• Name directors responsible for corporate governance.
• Obtain a certificate of incorporation from the state.
• Draft and submit articles of incorporation to the state.

Legal Documents Required

Essential documents for incorporation include:

• Articles of incorporation
• A business plan
• Bylaws
• IRS Form SS4 for an Employer Identification Number
• Share certificates

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 3 main types of corporations that companies choose to set up.

C Corporations

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

S corporations are designed for smaller entities with fewer than 100 shareholders. They offer significant tax benefits by allowing income to be taxed at individual shareholder rates rather than at both corporate and personal levels.

This structure avoids the issue of double taxation, which is common with C corporations.

To qualify as an S corporation, a business must meet specific criteria, such as being a domestic corporation, having only allowable shareholders (such as individuals and certain trusts), and having no more than one class of stock.

Deciding on the proper structure for a business need not be a one-and-done decision. It is often advantageous for a new small business to start out as an LLC. As the company and its revenues grow – along with the tax burden – it could be re-classified as an S Corporation.

It is essential to remember that the switch to an S Corporation classification must be completed by March 15 in order to be applicable for the following year.

Alternatively, the change must be made within 75 days of opening the LLC in order to be applicable for the year of opening. If a business has a valid reason for missing the deadline, it can apply to the IRS for late election relief.

Non-Profit Corporation

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.

Non-profits must adhere to specific regulatory requirements to maintain their tax-exempt status and are generally funded through donations, grants, and membership fees.