How Does a Corporation Work?

A corporation exists as an independent legal entity separate from its owners. It can own assets and debts and has the rights of an individual. A corporation protects its owners from personal liability to the debts and obligations of the company.

A corporation owner's personal assets are also protected from the company's liabilities and obligations. An owner's liability for a corporation's debts and obligations is limited to the amount he or she invested in the company. If the company goes bankrupt or becomes insolvent, the owner's personal assets cannot be used to settle with the company's creditors.

Management Structure of a Corporation

The management structure of a corporation consists of the:

  • Shareholders.
  • Officers.
  • Directors.
  • Employees.

An individual can be the sole shareholder, director, officer, and employee in a small corporation. In a corporation, the shareholders choose the people to serve on the company's board of directors and approve the company's articles of incorporation, bylaws, and mergers with other business entities.

The board of directors is responsible for issuing the company stocks and setting the valuation of the shares. The directors also enforce the company's rules and regulations and make strategic decisions on behalf of the company. Additionally, the board of directors selects company officers such as the president, treasurer, and secretary. The officers are responsible for the day-to-day running of the corporation.

How Corporations are Taxed

Corporations face double taxation. The corporation files its tax returns with the IRS once the company determines its taxable income after deducting salaries and other operating costs. A corporation can issue dividends to its shareholder from its after-tax profit. Earnings received from the corporation's profits must be reported as dividends on each shareholder's income tax returns. The IRS taxes these at the shareholder's personal income tax rate. However, shareholders can avoid double taxation if they do not withdraw their earnings from the business.

How Corporations Raise Money

Corporations can raise capital by selling the company's shares to investors. Once the board of directors determines the company stock's price per share, investors can buy stock with money, property, or expertise. The profits given to a corporation's shareholders are usually proportional to the value of their investment in the company.

Thus, a shareholder with 15 percent equity in a C Corp will receive 15 percent of the corporation's profits. Corporations can also issue stock certificates to company employees, but the initial shareholders must receive their stocks certificates before the company commences operation.

Regulatory Requirements of a Corporation

To protect the company's corporate status, corporations must follow specific guidelines:

  • The shareholders and directors of the C corporation must hold at least one meeting every year.
  • The company must keep the minutes from director and shareholder meetings to show its decision-making process.
  • The company must maintain a corporate ledger listing each shareholder's name and the percentage of the company they own.
  • A corporation must file annual reports and financial statements with individual states in which it's active.
  • The corporation must keep written bylaws of the company's rules and regulations at its primary business location.

Corporate Records

Corporate records are the records all U.S. corporations must maintain to prove they are operating according to state and IRS rules and regulations. Some corporations keep a physical corporate records book of all the necessary documents. Others maintain their corporate records in a file cabinet, hard drive, or online.

It is essential to keep these records in one location for easy access when the IRS wants to audit the company. You can store corporate records in the cloud, but be sure to use a safe and secure cloud service to prevent a breach of sensitive business information.

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