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Business Incorporation & Incorporating - Forms of Corporations

Corporate Definition,
Definition of Corporation

A corporation is a legal entity granted authority by a federal, state or provincial government to act as an individual, exercising the same rights and subject to the same obligations as any natural person. A corporation comprises a group of shareholders (of a for-profit company) or members (of a non-profit organization) whose identities remain distinctly separate from the corporate identity with respect to legal and taxation issues. Since a corporation is empowered with the same legal rights as those ascribed to individuals, it has the ability to sue and to be sued, to own assets, to hire and fire employees, and to borrow and loan money. Additionally, a corporation has the right to issue stock and to exist in perpetuity.

A corporation has an assessed value or worth; this worth is divided into units of ownership, called shares, which are then distributed to corporate stockholders. Shares having different attributes, such as voting rights or conversion rights, can be created, depending upon how the corporation is initially structured or later restructured. A publicly-traded company (not to be confused with a public corporation) is a corporation under which persons and organizations not associated with the corporation are granted the right to purchase corporate stock.

A privately-held corporation can be transformed into a publicly-traded company by issuing shares of stock for public consumption; this process is known as going public. Conversely, the management of a publicly-held corporation can take the company private by buying back all the publicly-held shares of company stock. Finally, a corporate takeover can be orchestrated when an individual or entity buys up or otherwise gains control of enough voting shares of a corporation to definitively influence the outcome of the company’s decision-making process. A corporate takeover is considered friendly (often referred to as a corporate merger when two corporations are involved) if both parties agree to the action and hostile if the management of the corporation resists the takeover. In a hostile takeover, some or all of the corporation’s board of directors are likely to be replaced.

Types and Characteristics of Corporations

In the United States, corporate legal structures have evolved to fulfill a variety of needs and interests. Paramount among the reasons behind forming a corporation is the concept of limited risk. In most cases, the risk to shareholders or members of a corporation is legally limited to the assets shareholders have contributed to the corporation; personal assets are immune from corporate debt obligations and legal attacks directed against the corporation.

The method by which corporations are defined depends upon the perspective from which the corporate structure is viewed. While the U.S. Internal Revenue Service (IRS) is concerned with defining corporations with respect to taxation, an investor will be more interested in a corporation’s status as privately held or publicly traded. The majority of business persons who contemplate forming a corporation are primarily motivated to do so by both risk abatement and tax reduction considerations.

Keeping in mind that corporations can be defined from multiple viewpoints, here are definitions for some common types of corporations:
  • C Corporation, also known as a General Corporation, is the most common form of corporation. Attributes of a C Corporation include:
    • Directors and shareholders remain anonymous;
    • There is no limit on the number of shareholders;
    • Shareholders do not have to be U.S. citizens or residents;
    • The corporation is treated as an independent legal entity;
    • The possibility exists to raise capital by selling shares of the corporation, which can be easily transferred;
    • Profits and losses are taxed at the corporate level;
    • Certain tax benefits may accrue to corporations that are not available to other business entities or to individuals, such as the ability to retain earnings for future activities or business expansion and the ability to deduct fringe benefits such as insurance, health plans and retirement plan deductions while leaving these benefits tax-free to owner-employees.
  • A Close Corporation possesses the attributes of a C Corporation with the following exceptions:
    • The number of corporate shareholders is limited to 30;
    • Shares cannot be transferred without prior approval by the corporate directors;
    • Public trading of shares is prohibited.
  • An S Corporation is a C Corporation which has applied to the IRS for and subsequently been granted special tax status. This special tax status enables corporate profit and loss to be reported on the personal tax returns of the shareholders, which enables shareholders to deduct losses that would be unreportable under a C Corporation and to avoid double taxation of dividends. (Dividends are taxed as profits to a C Corporation and as dividends to shareholders.) S Corporations are subject to certain restrictions, which include but are not limited to the following:
    • The number of corporate shareholders is limited to 75;
    • All shareholders must be U.S. citizens, residents of the U.S., estates or certain types of trusts;
    • Only one class of stock may be issued;
    • No more than 25 percent of gross corporate income may be derived from passive income;

Corporate Legal Requirements

Because a corporation is a complex legal entity, it is more expensive and more complicated to set up and operate than a sole proprietorship, partnership or limited liability company. A corporate charter, otherwise known as articles of incorporation, which describes the purpose, place of business and other details of the pending corporation, must be drawn up and filed, together with required fees, with the state or province in which incorporation is to occur. (This is not necessarily the state in which the business is physically located.)

While established under the auspices of states or provinces, corporations are governed by rules and regulations of both state (provincial) and federal governments, making them subject to greater legal formality and attendant paperwork. Failure of a corporation to file required paperwork, pay the necessary renewal fees or follow legal corporate formalities may be grounds for a court to overturn the liability protection afforded by the corporate structure and impose personal liability upon the shareholders; such legal action is known as piercing the veil of limited liability or piercing the corporate veil. Such action is not arbitrary, but must be brought by an individual creditor who must prove specific legal tenets.

Authored by Kenneth L. Anderson.  Original article published 30 October 2004.

Follow links to the right to learn more about websites and articles that can aid you in business incorporation or in establishing your business as a limited liability company. At the left margin, Related Links address topics of interest pertaining to business and ecommerce.

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