The Corporation

The textbook definition of a corporation is “a body of persons granted a charter legally recognizing them as a separate entity having its own rights, privileges, and liabilities separate from those of its members.”  Essentially, the corporation is a legally recognized entity separate from its members formed with the permission of the state.  As a legally recognized entity, it enjoys most of the rights and responsibilities of individuals – ownership of property, to sue or be sued, etc.

Formation: A corporation is formed when a person, the incorporator, files a document with the state known as the Articles of Incorporation.  This document contains the basic information about the corporation including the name and principle place of business, the corporation’s period of duration, the corporation’s stock, the registered agent, the directors and the incorporators of the company.  Most states maintain lengthy and detailed laws relating to the formation of corporations and may require the submission of materials in addition to the Articles of Incorporation.

Management: Although a corporation is a separate entity with rights of its own, it can’t think or act for itself but does so through its Board of Directors.  Directors are appointed by the shareholders and act like trustees, overseeing the business affairs of the corporation.  The directors generally oversee the strategic management of the corporation.  To manage the day to day operations, the directors appoint and hire officers.

Taxation: Since a corporation is an entity separate from its owners, the income of the corporation is taxed to the corporation itself at the applicable corporate tax rate.  In addition to the corporate tax, employees pay income tax on salaries and shareholders pay tax on dividends.  Thus, the revenue of the corporation is subject to taxation at two different levels before landing in the employee or shareholder’s bank account.

Liability: Generally no shareholder can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital he or she has contributed.

Transferability: Because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.  This trait makes transferring corporate ownerships fairly easy, subject to the rules the corporation subscribes for its shareholders in its organizing documents.

Dissolution: Dissolving a corporation can be a lengthy and complicated process.  At a minimum, the following steps are required:
•    Formal corporate action
•    Filing with the appropriate state offices
•    Statutory notice to creditors
•    Processing of all creditor claims
•    Sale and distribution of all remaining assets

Pros: Limited liability; possible tax advantages; clear management authority; ownership is transferable; continuous existence; easier to raise capital.

Cons: Highly regulated; Expensive formation and compliance; extensive record keeping necessary; double taxation of dividends; personal guarantees undermine limited liability advantage.

Bottom Line: A corporation is usually the most expensive and administratively complex entity to form, run and dissolve.  But, the corporate form offers the most definite division between ownership and the entity and therefore may provide the most liability protection for business owners.  Additionally, most investors prefer the corporate form as a barrier to personal liability and for its specificity of ownership and control via stock.