Corporate Law Dictionary: Everything You Need to Know
The corporate law dictionary defines terms used in reference to corporations and the rules and regulations that govern them.3 min read
2. Corporate Ownership
3. Requirements for Corporations
4. Corporate Taxation
5. Corporate Structure
The corporate law dictionary defines terms used in reference to corporations and the rules and regulations that govern them.
What Is a Corporation?
Corporations are a type of legal entity. There are different types of corporations, including:
- C corporations
- S corporations
- Nonprofit corporations
- Closed corporations
- Public corporations
There can be some overlap between these different types, and there are others that are less common.
State laws govern the corporations registered to conduct business in their state. Different states have different requirements for corporations, but most require regular meetings, reports, and fees in order for the corporation to remain in good standing. States can decide exactly how they would like corporations to be formed, operated, and dissolved within their jurisdiction.
Usually, corporations are made up of many shareholders. Smaller corporations might have somewhere between 5 and 50 shareholders, while larger corporations can have hundreds, even thousands. S Corporations are only allowed to have up to 100 shareholders. Some corporations have only two shareholders.
Closed corporations remain private and keep their shares among the original owners of the business. Sometimes, a member will sell their shares in a closed corporation, but it's usually to a person that all of the other shareholders approve of through a vote. Public corporations sell their shares publicly on the stock market.
The owners of a corporation are called shareholders. There can be different types of shareholders who own different types of stock. Some corporations choose to sell levels of stock, like Class A and Class B stock. The Class A stockholders will have voting rights when it comes to elections for the board of directors and other big company decisions, whereas the Class B stockholders will not have voting rights, but will still receive dividends.
Corporations provide liability protection for their owners because corporations are viewed as their own entity. A corporation is responsible for paying taxes and can sue or be sued, just like an individual. This individual treatment for corporations creates the corporate veil, which is the legal and financial protection afforded to a corporation's shareholders.
Requirements for Corporations
Although the requirements for corporations can differ from state to state, most states adhere to the Model Business Corporation Act. Corporations are required to file articles of incorporation with the state in which they plan to conduct business. Articles of incorporation, also called the corporate charter, certificate of incorporation, or articles of association, are legal documents that state the basic information for a particular corporation. Information covered includes:
- Business name and address
- Registered agent information
- Stock information (types and amount to be offered)
- Purpose for the business
If a corporation wants to do business in a state other than the one in which it is registered, it must follow that state's corporation laws as well.
There are certain federal laws for corporations that apply to specific types of corporations, like those in the public transportation industry. Federal securities laws impose certain requirements on U.S. corporations regarding their fiduciary responsibilities. Corporations are required to keep their investors and shareholders apprised of any and all major changes or decisions regarding the business.
The board of directors is required to hold annual meetings with the shareholders. Corporate directors are usually required to meet regularly without the shareholders present as well.
Corporations are subject to double taxation, meaning they are taxed on company income at the corporate level, and their shareholders are taxed on the dividends they take home. While this may seem like a disadvantage, it allows for the corporation to remain separate from its shareholders, which makes it easier for investors to transfer shares.
The tax rates for corporate income are lower than the tax rates for the profits distributed to individual shareholders.
Corporations have a distinct structure. The shareholders vote on a board of directors, and the board has officers. Everything from daily operations to big business decisions is handled by the board. Some boards will form committees to handle certain aspects of the business, like hiring or public relations.
The board of directors creates bylaws for the corporation. These are the governing documents for the business, like an operating agreement for an LLC. Corporate bylaws detail how the corporation handles certain situations, like:
- Transferring shares
- Hiring employees
- Amending the bylaws
- Holding meetings
Public corporations are required to have a board of directors.
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