What is business corporation is a common question asked by many people wanting to incorporate their business. Specifically, a corporation is a business structure that operates as a separate and distinct legal entity. It is owned by shareholders and managed by a board of directors who appoint officers to oversee the business’s daily operations.

Since a corporation is referred to as a ‘legal person,’ it can purchase, sell, and own property. It can also enter into contracts, sue other parties, and be sued. Note that a corporation cannot be a nonprofit organization, municipal corporation (i.e. city or town), or a private corporation established to earn a profit. With that said, most corporations are formed with the intent to earn profits for their shareholders.

Forming a Corporation

If you want to incorporate your business, you’ll first need to choose the state to incorporate. You will usually choose the state based on where your company is located and where it conducts the most business. However, some businesses wish to incorporate in a state that offers few regulations and no corporate income tax, including Delaware, Nevada, and Wyoming.

Some of the requirements for incorporating your business include:

  • Filing Articles of Incorporation
  • Issuing stock to shareholders
  • Hiring a board of directors
  • Drafting bylaws
  • Understanding how taxes should be paid and how shareholders/employees will be compensated
  • Drafting a Buy-sell agreement

Articles of Incorporation

Regardless of the state in which you are incorporating, you will need to file the Articles of Incorporation with the Secretary of State. This document will include general information about your business, such as your business’s name and address, a description of the business, the name and address of the registered agent, the number of shares being issued, and the names of the shareholders (and number of shares that each shareholder holds).

Issuing Stock

After filing the Articles of Incorporation, you will need to issue stock to the shareholders in exchange for either cash or some type of asset given in return for the stock. A corporation can have only one shareholder or several shareholders. Generally, if the corporation is publicly traded, then there could be thousands of shareholders who generally receive one vote per share. These shareholders will elect a board of directors who oversee the management activities of the business.

Hiring Board of Directors

The members of the board of directors are in charge of the overall management of the business. If they engage in fraudulent behavior, they can be held personally liable to the shareholders and corporation. Every year, the board of directors elect officers who oversee the daily operations of the business. The officers include the president, secretary, treasurer, and others.

Drafting Bylaws

The directors and shareholders should work together to draft the corporate bylaws. This document will include how often the directors hold meetings, when such meetings are held, whether the business will operate on a calendar or fiscal year, how long the directors serve their terms, and other important decision making processes.

Taxes and Salary

Corporations are required to file Form 1120 with the IRS and pay corporate income tax (C corps only). Salaries that are paid to shareholder-employees are deductible. A shareholder-employee is a shareholder who engages in significant work for the business in that he or she is also considered an employee for tax purposes.

If dividends are paid to the shareholders, those funds aren’t deductible. Therefore, these payments don’t reduce the business’s tax implications. If the corporation earns its income from personal services provided by the shareholders themselves, i.e. legal assistance, medical or dental offices, consulting services, etc., then your business must end its tax year on December 31.

Buy-Sell Agreement

If operating a small corporation, the shareholders should enter into a buy-sell agreement, which provides for what happens to the corporation if a shareholder dies, becomes disabled, or shares his or her stock. Be mindful that if the shareholder sells his or her shares to several individuals, then the business might need to register with the Securities & Exchange Commission (SEC) or state regulator.

Alternatively, corporations with few shareholders can issue shares without registering with the SEC through a private offering exemption.

If you need help learning more about forming a corporation for your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.