Corporate Structure
A corporation or regular corporation is the default business entity created when you incorporate a business.
What does a corporation consist of?
A corporation or regular corporation is the default business entity created when you incorporate a business.
How Does a Corporation Work?
A corporation exists as an independent legal entity separate from its owners. It can own assets and debts and has the rights of an individual. A corporation protects its owners from personal liability to the debts and obligations of the company.
A corporation owner’s personal assets are also protected from the company’s liabilities and obligations. An owner’s liability for a corporation’s debts and obligations is limited to the amount he or she invested in the company. If the company goes bankrupt or becomes insolvent, the owner’s personal assets cannot be used to settle with the company’s creditors.
Management Structure of a Corporation
The management structure of a corporation consists of the:
- Shareholders.
- Officers.
- Directors.
- Employees.
An individual can be the sole shareholder, director, officer, and employee in a small corporation. In a corporation, the shareholders choose the people to serve on the company’s board of directors and approve the company’s articles of incorporation, bylaws, and mergers with other business entities.
The board of directors is responsible for issuing the company stocks and setting the valuation of the shares. The directors also enforce the company’s rules and regulations and make strategic decisions on behalf of the company. Additionally, the board of directors selects company officers such as the president, treasurer, and secretary. The officers are responsible for the day-to-day running of the corporation.
The Creation of a Corporation
A corporation is created when it is incorporated by a group of shareholders who have ownership of the corporation, represented by their holding of common stock, to pursue a common goal. A corporation's goals can be for-profit or not, as with charities. However, the vast majority of corporations aim to provide a return for its shareholders. Shareholders, as owners of a percentage of the corporation, are only responsible for the payment of their shares to the company's treasury upon issuance. A corporation can have a single shareholder or several. With publicly traded corporations, there are often thousands of shareholders. Corporations are created and regulated under corporate laws in their jurisdictions of residence. In the United States, the most common type of corporation is a C Corporation.
- Determine the state for incorporation.
- Choose a business name.
- Appoint the initial directors.
- File the articles of incorporation with the concerned state agency (usually the secretary of state) and pay the applicable filing fee. Articles act as the corporate charter; they create a corporation.
- Draft the corporate bylaws for internal governance of the corporation.
- Conduct the first board meeting of directors.
- Obtain necessary licenses and permits applicable to your industry and place of business.
- Corporations face double taxation. The corporation files its tax returns with the IRS once the company determines its taxable income after deducting salaries and other operating costs. A corporation can issue dividends to its shareholder from its after-tax profit. Earnings received from the corporation’s profits must be reported as dividends on each shareholder’s income tax returns. The IRS taxes these at the shareholder’s personal income tax rate. However, shareholders can avoid double taxation if they do not withdraw their earnings from the business.
To protect the company’s corporate status, corporations must follow specific guidelines:
- The shareholders and directors of the C corporation must hold at least one meeting every year.
- The company must keep the minutes from director and shareholder meetings to show its decision-making process.
- The company must maintain a corporate ledger listing each shareholder’s name and the percentage of the company they own.
- A corporation must file annual reports and financial statements with individual states in which it’s active.
- The corporation must keep written bylaws of the company’s rules and regulations at its primary business location.
Corporations can raise capital by selling the company’s shares to investors. Once the board of directors determines the company stock’s price per share, investors can buy stock with money, property, or expertise. The profits given to a corporation’s shareholders are usually proportional to the value of their investment in the company.
Thus, a shareholder with 15 percent equity in a C Corp will receive 15 percent of the corporation’s profits. Corporations can also issue stock certificates to company employees, but the initial shareholders must receive their stocks certificates before the company commences operation.
Corporate records are the records all U.S. corporations must maintain to prove they are operating according to state and IRS rules and regulations. Some corporations keep a physical corporate records book of all the necessary documents. Others maintain their corporate records in a file cabinet, hard drive, or online.
It is essential to keep these records in one location for easy access when the IRS wants to audit the company. You can store corporate records in the cloud but be sure to use a safe and secure cloud service to prevent a breach of sensitive business information.
What Is an Example of a Corporation?
A corporation is a legal entity independent of its members. It holds authority and can incur liability on its own.
What is an example of a corporation? Apple Inc., Walmart Inc., and Microsoft Corporation are all examples of corporations.
Basics of a Corporation
A corporation is a legal entity independent of its members. It holds authority and can incur liability on its own. A corporation conducts its business like an artificial person.
Traditional corporations are often known as C corporations. The letter “C” refers to Section C of the Internal Revenue Code (IRS) under which corporations file their corporate taxes. By default, the IRS treats a corporation as a C-corp unless it is registered as some other type of corporation.
an llc, or limited liability company, is a hybrid business structure that combines the limited liability benefits of a corporation and the tax features of a partnership. owners of an llc are referred to as members, and an llc can be either a single-member or multi-member llc. also note that llcs are regulated at the state level, so the rules and regulations regarding llcs differ by state.
Characteristics of a Corporation
Following are the major distinguishing characteristics of a corporation:
- Ownership
Shareholders are the owners of a corporation.
- Board of Directors
A corporation is managed by a board of directors, which is elected by the shareholders.
- Perpetual Existence
A corporation continues to exist for an unlimited period of time. It remains unaffected by the retirement or death of its shareholders. A corporation terminates only if:
- Its shareholders dissolve it, or
- It becomes bankrupt.
- Limited Liability
Shareholders of a corporation have limited liability. If the corporation becomes bankrupt, creditors cannot pursue personal assets of the shareholders. However, under certain circumstances like fraud and illegal activities, courts may lift the corporate veil and make the shareholders personally liable for the resulting debts and liabilities.
The limited liability feature has made corporations a popular form of business in the United States. If the corporation is unable to meet its debts and obligations, its shares tend to lose their value. However, shareholders cannot be forced to pay back the company debts.
- Corporate Taxes
Corporations are liable to pay taxes on their income even if the income is distributed among shareholders as dividend. Since the distributed income is again taxed in the hands of the shareholders, this often results in double taxation.
- Distinct Legal Entity
Corporations are distinct legal entities that exist independent of their shareholders. They can own assets, enter into contracts, borrow money, sue others, and can be sued in their own name.
Disadvantages of a Corporation
The corporate structure may not be suitable for all types of businesses. Forming and operating a corporation involves lots of formalities and paperwork. They are highly governed entities compared to other forms of businesses like partnerships and sole proprietorships. Corporations are also more expensive to operate.
Double taxation is a common complaint against corporations. Shareholders end up paying taxes twice on their business income: first in the hands of the corporation and then again in their individual capacity when they receive their business income as dividend.
What Is an S Corporation?
An eligible corporation can elect for special tax treatment under subchapter S of the IRS code. Making an S-corp election allows the corporation to pass through its profits and losses to its individual shareholders instead of paying income tax at the corporate level. Thus, an S-Corp election is effective in eliminating double taxation.
- Limited liability.
- Pass-through taxation.
- Attractive for investors.
- Tax filing frequency of just once a year.
- Ownership or membership is restricted to citizens and legal resident of the United States.
- You cannot have more than 100 shareholders.
- You must first go through the complete process and cost of incorporation before being able to make the S-corp election.
- Failure to file mandatory returns and taxes may result in termination of your S-corp status.
- S corporations are subject to closer IRS scrutiny.
Advantages and disadvantages of
an LLC vs. a corporation
A limited liability company (LLC) is a type of business structure that offers personal liability protection, as well as a few tax advantages. The “LL,” or limited liability, in LLC is what protects your personal assets in the event of a judgment against your company. Traditional corporations offer limited liability as well, so let’s focus on the structural and taxation differences to explain the differences of LLCs vs. corporations in the chart below.
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| Diadvantages of an LLC |
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| Advantages of a corporation |
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| Disadvantages of a corporation |
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