Key Takeaways

  • A corporation is a distinct legal entity owned by shareholders and managed by a board of directors.
  • Corporations can enter contracts, own property, sue and be sued, and continue existing beyond the lives of their owners.
  • Articles of Incorporation establish a corporation’s legal existence and outline its basic structure.
  • Stock issuance, board elections, bylaws, and buy-sell agreements are crucial steps in corporate formation.
  • Tax treatment varies based on structure (e.g., C corp vs. S corp), and corporations must comply with ongoing state and federal reporting requirements.
  • Different types of corporations (e.g., C corp, S corp, B corp, nonprofit) serve unique purposes and offer varied benefits and obligations.

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

Types of Corporations

When exploring what is a corporation, it’s important to understand that there isn’t just one type. Corporations can take several forms, each with different tax treatments, ownership structures, and operational rules:

  • C Corporation: The most common type, taxed as a separate legal entity. Profits are taxed at the corporate level, and dividends are taxed again on shareholders’ returns (double taxation).
  • S Corporation: Offers pass-through taxation, meaning profits and losses flow directly to shareholders’ personal tax returns. It’s limited to 100 shareholders who must meet IRS eligibility requirements.
  • B Corporation (Benefit Corporation): Operates like a traditional corporation but is legally required to consider social and environmental impact in decision-making.
  • Nonprofit Corporation: Formed for charitable, educational, or religious purposes. Nonprofits are exempt from federal income taxes if they qualify under IRS 501(c)(3).
  • Close Corporation: A privately held entity with fewer shareholders and less formal structure, often used by small businesses and family-owned companies.

Choosing the right type depends on factors like business goals, growth plans, and desired tax treatment.

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).

Key Elements of Articles of Incorporation

The Articles of Incorporation, sometimes called a Certificate of Incorporation or Corporate Charter, are the foundation of your corporation. They are filed with the state and must include essential details, such as:

  • Corporate name and principal office address
  • Registered agent information (the individual or company authorized to receive legal documents)
  • Business purpose – a brief description of the corporation’s activities
  • Share structure – including the number and type of shares authorized
  • Names and addresses of incorporators and initial directors
  • Duration of the corporation – often perpetual unless stated otherwise

Some states may require additional clauses, such as indemnification of directors or shareholder voting rights.

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.

Shareholder Rights and Responsibilities

When you issue stock, you’re not only raising capital — you’re also granting shareholders specific rights. These typically include:

  • Voting rights: Shareholders can vote on major corporate decisions, including electing the board of directors.
  • Dividend rights: Entitlement to a portion of the company’s profits when distributed.
  • Inspection rights: Ability to review corporate books and records under certain conditions.
  • Preemptive rights: In some cases, existing shareholders may have the first opportunity to buy new shares before they’re offered to the public.

While shareholders own the corporation, they do not manage its day-to-day operations. That responsibility falls to the board and officers.

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.

Corporate Governance and Compliance

Bylaws establish how a corporation is governed, but compliance extends beyond internal rules. Corporations must also adhere to ongoing legal obligations to maintain their “good standing” with the state. Common requirements include:

  • Annual reports: Filed with the state to update information about directors, officers, and registered agents.
  • Franchise taxes: Many states charge annual fees or taxes based on revenue, assets, or a flat rate.
  • Board and shareholder meetings: Corporations must hold regular meetings and document them in official minutes.
  • Record-keeping: Maintaining accurate records of financial statements, meeting minutes, and resolutions is essential for legal and tax purposes.

Failing to meet these obligations can result in penalties, loss of good standing, or even dissolution.

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.

Corporate Tax Considerations and Double Taxation

One of the most discussed aspects when learning what is a corporation is taxation. Traditional C corporations face double taxation: once at the corporate level on profits and again at the shareholder level when dividends are distributed. However, businesses can mitigate this by:

  • Paying reasonable salaries to shareholder-employees (deductible as a business expense).
  • Reinvesting profits back into the company rather than issuing dividends.
  • Electing S corporation status (if eligible) to avoid corporate-level taxation and pass income directly to shareholders.

Additionally, corporations may qualify for certain tax deductions, such as business expenses, depreciation, and employee benefits, which can significantly reduce taxable income.

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.

Frequently Asked Questions

  1. What is a corporation in simple terms?
    A corporation is a legal entity separate from its owners. It can own property, enter contracts, and is responsible for its debts and obligations, not the individual shareholders.
  2. How is a corporation different from an LLC?
    While both offer limited liability, a corporation is generally more formal, can issue stock, and is better suited for raising capital. An LLC offers more flexibility in taxation and management.
  3. How long does it take to form a corporation?
    The timeline varies by state but typically ranges from a few days to a few weeks, depending on state processing times and whether expedited services are used.
  4. Can a corporation exist indefinitely?
    Yes. Most corporations are formed with “perpetual existence,” meaning they continue to exist even if ownership changes or shareholders pass away.
  5. What ongoing obligations does a corporation have?
    Corporations must file annual reports, hold meetings, maintain records, pay applicable taxes, and comply with state and federal laws to remain in good standing.

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