Form a business corporation -- The BasicsAre you thinking you may want to form a business corporation? Corporations are valuable business entities to limit liability, but require more formalities than other business types, such as partnerships and LLC’s. What is a corporation?Generally, a corporation is a legal entity that is entirely the product of state law. Corporations, unlike sole proprietorships and partnerships, are legally distinct from the owners (“shareholders”). Owners, by and large, are not personally liable for the obligations of the corporation; neither are the corporation’s directors or officers. The owner’s risk is limited to the investment that they made in the business to purchase ownership interests (“shares”), therefore, provided the rules are followed, a corporation is good for protection of personal assets. The right to manage a corporation is generally not spread out among the shareholders, but is centralized in the hands of a board of directors (“board”). The board then generally delegates day-to-day management duties to officers. This business form allows for a person that wants to set up a business entity to bring in new investors in exchange for ownership interests to do so. Also, a corporation may perpetually exist and does not die with death of owners or changes in ownership. How do I go about forming a corporation?Creation of a corporation requires filing documents, such as Articles of Incorporation, with the state. Also, generally corporations must have bylaws. Overall, there is more formality in formation and in day-to-day execution than other types of business entities. Advantages:
• centralized management • separation of management and ownership allows for ability of owners to avoid conflicts with co-owners about the management of the business • freely transferable ownership—shareholder can generally sell shares at will • continuity of life; business does not die with death of owner(s) Disadvantages:
• extensive record keeping • more difficult, expensive to organize than other business forms • potentially double taxation (“C” corporation) • inflexibility of operations Although the information here is generally accurate, it is important to note that every state has different requirements for business formation of any business type-sole proprietor, partnerships, corporations and LLC’s. Consult with your state’s laws or an attorney to ensure that you are following the proper procedures to form a business corporation.
Form a Business Corporation -- or an LLC? Learn about LLC's here.
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