What is a Corporation?
A corporation is a formal organization associated with a publicly registered charter. Corporations are companies that are typically large in size. A corporation’s business model entails the creation or delivery of a specified product or service to a particular consumer base. The majority of corporations are created to earn a profit for the owners, officers, and shareholders (for public corporations) of the business.
A corporation is a separate legal entity. This formation allows a corporation to possess its own privileges and distinct liabilities. Corporations are a fundamental aspect of a capitalistic society and a competitive market. In exchange for a unique service or product, a corporation will seek a profit through the purchase of their goods or through investment in stock or other forms of equity.
Corporations are developed in accordance with corporate law. The rules established through this breadth of law balance the interests of the operators, shareholders, the consumer base, creditors, and all employees associated with the corporation.
Corporations may be structured in a variety of ways, but in most instances, a corporation will possess limited liability. If a corporation goes insolvent, the brunt of the financial loss is transferred over to the shareholders and employees of the entity. The shareholder’s investment in the corporation decreases proportionately with the entity’s struggles and employees will suffer from cutbacks or mass layoffs.
All liabilities associated with the corporation’s debts will be handled by the operators of the corporation. If the corporation goes insolvent, the board of directors will be forced to fulfill their loan requirements to the underlying creditors.
A corporation possesses a hierarchy. There are employees who produce the particular good or service and a management team who is responsible for upholding the financial aspects of the business model.
There are four core characteristics of a corporation. All corporations possess: A legal personality, limited liability, a centralized management team, and transferable shares.
A corporation may be structured in two distinct forms: For-profit or not-for-profit entities. Most corporations develop a profit-based model which will seek a profit (income outweighs liabilities) through the delivery of a tangible item, good, or service. A not-for-profit structure aims to produce a good or service that benefits society without accruing profits for the corporation’s shareholders or officers.
Types of Corporations:
A business may choose from several corporate entities, based on their individual needs.
Also referred to as a “C” corporation, a general corporation is the most corporate formation. A general corporation may have any number of stockholders; consequently, a general corporation is typically chosen by companies who plan to have more than 30 stockholders or large public offerings. Larger corporations, thus, file as a general corporation. A general corporation (and all corporations for that matter) is regarded as separate legal entities. Because of this characteristic, an individual stockholder’s personal liability is typically limited to amount of shares or investment in the corporation.
Close corporations are appropriate for the individual starting a company by him or herself or with a small number of people. Unlike a general corporation, a close corporation will limit stockholders to a maximum of 30. Furthermore, a close corporation will require that the owners and directors must first offer shares to existing shareholders before selling issues to new stockholders. Not every state in the U.S. will recognize a close corporation.
An S Corporation is a general corporation that elects a special tax status with the Internal Revenue Service after the corporation has been formed. An S corporation is most appropriate for entrepreneurs and small business owners who prefer to be taxed as partners or sole proprietors. When general corporations secure profits, they are forced to pay a federal corporate income tax. If the general corporation also declares a dividend, stockholders must report the funds as personal income and pay more taxes. An S Corporation will avoid this “double taxation” (at the corporate and personal level) because all income is reported once on the personal tax returns of the stockholders.
For a number of small businesses, by combining the tax advantages of a partnership or a sole proprietorship with the limited liability, S Corporations offer primary benefits and the classification of a corporation.
Although the S Corporation awards the owner a number of benefits, there are restrictions attached to the filing. To form an S Corporation, the corporation must accede with the following guidelines:
• Stockholders must be citizens or permanent residents of the U.S.
• An S Corporation cannot have more than 75 stockholders
• If the S Corporation is held by an “electing small business trust”, then the attached beneficiaries of the trust must be charitable organizations, estates or individuals.
• No more than 25 percent of the corporation’s gross income may be derived from passive income.
• An S Corporation is only allowed to issue one class of stock.
The following entities may not form an S Corporation:
• Any financial institution that is a bank
• Domestic International Sales Corporations
• Some affiliated groups of corporations
Limited Liability Companies:
Although not a corporation, an LLC offers a number of the same advantages. Because of this, a small business owner may prefer an LLC because they combine the “pass through” taxation of a partnership or a sole proprietorship with the limited liability protection offered by corporation formations.
Advantages offered by an LLC over corporations:
• An LLC offers greater flexibility with regards to business organization and management
• An LLC does not have the ownership restrictions of an S Corporation; this characteristic makes them ideal business structures for a foreign investor
• An LLC is available to all states (and Washington, D.C.) in the U.S.
• An LLC will offer these advantages without the restrictions placed on the S Corporation.
Ownership of a Corporation:
Corporations can possess the right to vote or receive dividends once declared by the corporation’s board of directors. In a for-profit corporation structure, voters will hold shares of stock; these shareholders own a percentage of the corporation in proportion to the amount of shares they purchased. If the corporation does not have any stockholders, the entity will have members who have the authority to vote on its operations.
These voting members are not the persons of the corporation; members of a non-stock corporation will be specifically identified—in regards to the role and percentage of ownership—in the Articles of Incorporation and the title given to the entity may vary. In both profit and not-for-profit non-stock corporations, the ownership of the corporation is owned and operated by a group of individuals with a distinct legal status. These individuals are awarded special privileges that are not provided to ordinary unincorporated entities, to voluntary associations or to collective individuals.
In general, there are two classes of corporate governance forms. In most regions, control of a corporation is determined by a board of directors elected by the shareholders. In some jurisdictions, however, the control of the corporation is divided into two classifications with a supervisory board which elects a management division.
A corporation may also be controlled by a bank or lending institution. In return for offering funds to the corporation, a creditor can demand a controlling interest, including multiple seats on the board of directors.
How is a Corporation Named and Formed?
Corporations used to be created by a charter granted by a public body. In present times a corporation is typically registered with the province, state or national government and regulated by the regulations by that particular government. Registration is the primary prerequisite to the corporation’s assumption of limited liability.
Laws surrounding formation require the corporation to designate a principal address, as well as the name of a registered person or company—a registered person is required to receive legal service of process. During the formation process, the corporation may also be required to designate a legal representative or an agent of the corporation.
In most instances, a corporation will file an article of incorporation with the government in which they reside. This process will establish the general nature of the corporation, the names and addresses of directors and the amount of stock it is authorized to issue. When the Articles of Incorporation are approved, the entity’s directors will meet to create bylaws to govern the internal functions of the corporation.
The jurisdiction’s laws in which the corporation operates will regulate the majority of the entity’s internal activities and finances. If the corporation operates outside its home state, the entity is required to register with other governments as a foreign corporation. When an entity registers with a foreign government it will be subject to laws pertaining to crimes, contracts, employment, and civil actions etc. of the host state.
A corporation will generally have a distinct name. In most regions, a corporation’s name will include a term or abbreviation that denotes the entity’s status (I.E. “Inc.” or Incorporated).
Financial Disclosure Laws:
In most jurisdictions, corporations–whose shareholders benefit from limited liability protection–are required to publish annual financial statements so that creditors are able to evaluate the entity’s creditworthiness of the corporation. Publicizing financial information is also necessary because it awards investors an opportunity to research and forecast the corporation’s short and long-term prospects. This disclosure also strips the liability from shareholders; a creditor will not file claims against the shareholder because of the availability of information. As a result, a shareholder will sacrifice a loss of privacy in return for limited liability.
How are Corporations Taxed?
In the United States, corporate tax is imposed at the Federal, the majority of state and some local levels on the corporation’s annual income. The federal tax rate on corporate taxable income will vary from 15% to 35%. State and local taxes will vary by jurisdiction, though many rates are based on Federal definitions and concepts.
Corporate tax laws in the United States are complex; deductions and the location of the corporation will affect the entity’s rate. A number of corporate transactions are not taxable. The majority of formations and some types of acquisitions, mergers and liquidations are free from taxation. A corporation may also be subject to foreign income taxes and may be awarded a foreign tax credit for this levy.
A shareholder of a corporation will be taxed on the dividends distributed by the entity. A shareholder of a mutual fund or S Corporation is taxed on corporate income and will not pay tax on dividends.
For a general purpose, a system of graduated marginal tax rates is applied to the entity’s taxable income, including all capital gains. The marginal tax rates on a corporation’s income are as follows:
• For corporations with a taxable income between 0 to 50,000 the tax rate is 15%
• For corporations with a taxable income between 50,000 to 75,000 the tax rate is $7,500+25% of the amount over 50,000
• For corporations with a taxable income between 75,000 to 100,000 the tax rate is $13,750 + 34% of the amount over 75,000
• For corporations with a taxable income between 100,000 to 335,000 the tax rate is $22,250 +39% of the amount 100,000
• For corporations with a taxable income between 335,000 to 10,000,000 the tax rate is $113,900 + 34% of the amount over 335,000
• For corporations with a taxable income between 10,000,000 to 15,000,000 the tax rate is $3,400,000 + 35% of the amount over 10,000,000
• For corporations with a taxable income between 15,000,000 to 18,333,333 the tax rate is $5,150,000 + 38% of the amount over 15,000,000
• For corporations with a taxable income over 18,333,333 the tax rate is 35%
Corporate Law Defined
Corporate law regulates and enforces laws on the business models of corporations to ensure the delivery of moral and sound business practices. Corporate law balances the legal implications and rights for shareholders, creditors, employees, directors, and the consumer markets.
To carry out the regulations, the scope of law attaches a legal personality to each corporation. Through the classification of a “natural person” a corporation is liable to lawsuits and tax initiatives. In essence, corporate law will treat a corporation as a human being. Corporate law states that a corporation attaches a limited liability structure to the shareholders of a business entity. As a result, if the company goes insolvent the investors within the model will lose money in proportion to their initial investment.
All corporations possess transferable shares. These shares can be purchased or sold on listed exchanges. The control of the business entity is placed in the hands of a board of directors.