1. What Is a Corporation?
2. Advantages and Disadvantages of a Corporation
3. How To Form a Corporation

The legal life of a corporation is perpetual. Corporations are a separate legal entity from the owners or shareholders, and as long as the corporation is in legal status, it is considered active. Legal status includes:

  • Continuity of life.
  • Centralized management.
  • Limited liability.
  • Transfer of interests.

What Is a Corporation?

A corporation is different from a sole proprietorship or partnership because the corporation is a legal entity separate from its owners. This allows the owners and shareholders to avoid personal liability from any debts of legal claims made against the corporation. To maintain the corporation status, the following must occur:

  • Hold annual corporate meetings.
  • Record meeting minutes.
  • Issue stock certificates to shareholders.
  • Elect a board of directors.
  • Ratify and confirm the existing directors status.

A corporation's main advantage, and why it is widely used, is liability protection. The personal assets cannot be used to fulfill the debts and obligations of the corporation. The only caveat to this rule is if it is shown that the corporation has acted improperly. This action is called piercing the corporate veil. Proof of wrongdoing can include:

  • Failing to follow corporate formalities including holding the annual meeting or keeping meeting minutes.
  • Proof exists that the corporation is being used only to protect the shareholder's personal assets.

If proven, when the veil is removed, the shareholders will become personally liable.

Advantages and Disadvantages of a Corporation

Other advantages of using a corporation include:

  • Earnings can be kept in the corporation for use in future investment opportunities or dividends.
  • Corporations are simple to form and clearly laid out by the laws of the state of formation.
  • Tax advantages including the ability to retain or pass the earnings.

Forming a corporation also has disadvantages including:

  • Maintaining legally required formalities to retain corporate status.
  • The administration is complicated must follow federal and state tax procedures which can be expensive.
  • Fees at the initial formation and annual filing fees can be costly.
  • Accounting and tax preparation fees can be high and are necessary to meet corporate laws.
  • Professional tax advice is to necessary to limit double taxation.

How To Form a Corporation

Compared to a sole partnership or sole proprietorship, forming a corporation is more expensive and complicated based on the requirement to file with the state Secretary of State office or website. A filing is also a requirement to form an LLC. With that said, the formation process includes filing the articles of incorporation with the state Secretary of State, or related agency. It is required in some states that a copy of the certificate is kept with the local recorder office.

Forming the corporation does not have to take place in the state where business will take place. Many corporations from in Nevada or Delaware to take advantage of laws put in place for the benefit of the corporation. If the corporation conducts business in other states, they must file as a foreign corporation in those states. As a foreign corporation, you must: select a registered agent (someone who can receive and act as a representative of the corporation), and pay the initial and annual fees.

Selecting a name for the corporation is an important step. When selecting a name, it must be:

  • Unique in that it is not in used by another business entity.
  • It cannot be confused with or too similar to another business entity or competitor.
  • It must meet the legal requirements dictated by the state of formation.

Registering the name can take place on the phone, online, or through the mail. Check with the state website to confirm the options.

Professional service providers can form as a corporation. Professional services cover doctors, lawyers, accountants, and other services that require a license. Professional corporations can only perform the service they are licensed to perform. An example would be that a law firm may not also offer accounting services.

For professionals, a corporation is ideal because it protects them from liability when malpractice is committed by others in the corporation. This does not protect themselves in the case of their wrongdoing. As a professional corporation, the name is legally required to identify itself accordingly. Examples include P.C, P.A., incorporated, or chartered.

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