A corporation is a body or group of people who come together to form a legal business entity. Once formed, a corporation is an entity of its own, set apart from the group of people that own it, manage it and control it. Corporations can be referred to as a legal "person or entity" that can be bound by law to contracts. Corporations are also liable as an entity for taxes and debts the same way as an individual person can be. A corporation is so set apart from its owners that it will not cease to exist when one or more of its owners die or leave the corporation. The owners of a corporation are referred to as "shareholders".
The owners or "shareholders" of a corporation are not personally or legally responsible for any debts incurred by the corporation they own. This is referred to as "limited liability" of the owners. People will incorporate their business so as to protect their personal assets from lawsuits incurred by their business corporation. Corporation status gives them limited liability.
The great benefit of forming a corporation is that the owners have limited liability when it comes to the business debts of the corporation. When a lawsuit is filed against a corporation, only the assets that are owned by the corporation are at risk. The owner's or "shareholders" own personal assets are protected from lawsuits against their corporation. Many times, small businesses will form corporations to protect the personal property or assets of the shareholders, such as a home or car, from being taken in a lawsuit. When a business has been incorporated, the owners can not be forced to sell off their own assets to pay for the debts incurred by the corporation. However, certain requirements called formalities must be fulfilled to keep the limited liability status of the small business corporation. Decision making for a corporation must carefully follow certain rules and good record keeping in essential.
There are a few exceptions of limited liabilities for any corporation. These exceptions mean that shareholders can be personally sued if:
Corporations are formed by filing an "Articles of Incorporation" form with the incorporation division of the Secretary of State's office and paying the required filing fee. On the form will be basic questions such as, the name and address of the corporation, the phone number of the registering agent (the person who files the form). The registering agent must be one of the owners of the corporation. Some states will also require a list of the names of the directors of the corporation. Once the "articles of incorporation" form is filed, corporate bylaws must be created and stock certificates in the corporation will need to be issued to the original shareholders and recorded.
Corporate bylaws have to written up and kept on record and followed for the corporation to retain its limited liability status. These bylaws should spell out the rules and formalities that govern the decision making of the corporation. They can include such things as how often board of directors and shareholders must meet, how many votes will be needed to approve a corporate decision, how the voting process is to be conducted, how the minutes are to be kept, etc.
Once the corporation has been set up, certain things known as formalities need to be kept in order to retain the corporation status as a separate entity for the shareholders to claim limited liabilities. To keep limited liabilities the corporation must:
Corporate income tax returns must be filed like any other individual income taxes, only they will be filed in the name of the corporation, not the owner. Corporation income taxes are paid on the net profits remaining after all expenses are paid by the corporation. These expenses include wages and salaries of all employees, even the owner if he works for the corporation. Other expenses are employee bonuses, inventory and overhead expenses paid by the business. After all the expenses are deducted, then income taxes will be figured on the remaining profit. Corporations file income taxes on IRS Form 1120 and are subject to special corporate tax rates.
If you have questions or need further help in forming a corporation for your business, you should contact a corporate business lawyer for more information.
Why people incorporate their businesses
The owners or "shareholders" of a corporation are not personally or legally responsible for any debts incurred by the corporation they own. This is referred to as "limited liability" of the owners. People will incorporate their business so as to protect their personal assets from lawsuits incurred by their business corporation. Corporation status gives them limited liability.
Limited Liability
The great benefit of forming a corporation is that the owners have limited liability when it comes to the business debts of the corporation. When a lawsuit is filed against a corporation, only the assets that are owned by the corporation are at risk. The owner's or "shareholders" own personal assets are protected from lawsuits against their corporation. Many times, small businesses will form corporations to protect the personal property or assets of the shareholders, such as a home or car, from being taken in a lawsuit. When a business has been incorporated, the owners can not be forced to sell off their own assets to pay for the debts incurred by the corporation. However, certain requirements called formalities must be fulfilled to keep the limited liability status of the small business corporation. Decision making for a corporation must carefully follow certain rules and good record keeping in essential.
Exceptions to Corporate Limited Liability
There are a few exceptions of limited liabilities for any corporation. These exceptions mean that shareholders can be personally sued if:
- The shareholder has personally brought injury upon another individual
- The shareholders have personally said they will guaranty a loan or business debt if the corporation defaults
- They do not deposit employee taxes they have held from employee wages
- The shareholders commit a fraudulent act
- They do not treat the corporation as a separate entity but as a part of their very own personal affairs
- The shareholders do not follow the formalities, rules and regulations for maintaining the corporation.
- Not sufficiently capitalizing the corporation - investing insufficient amount money from its start
- Not issuing stock to the shareholders who formed the corporation
- Not holding regular director meetings with the shareholders
- Not keeping the business records separated from the shareholders personal accounts
How a Corporation is Formed
Corporations are formed by filing an "Articles of Incorporation" form with the incorporation division of the Secretary of State's office and paying the required filing fee. On the form will be basic questions such as, the name and address of the corporation, the phone number of the registering agent (the person who files the form). The registering agent must be one of the owners of the corporation. Some states will also require a list of the names of the directors of the corporation. Once the "articles of incorporation" form is filed, corporate bylaws must be created and stock certificates in the corporation will need to be issued to the original shareholders and recorded.
Corporate Bylaws
Corporate bylaws have to written up and kept on record and followed for the corporation to retain its limited liability status. These bylaws should spell out the rules and formalities that govern the decision making of the corporation. They can include such things as how often board of directors and shareholders must meet, how many votes will be needed to approve a corporate decision, how the voting process is to be conducted, how the minutes are to be kept, etc.
Keeping the Corporate Status
Once the corporation has been set up, certain things known as formalities need to be kept in order to retain the corporation status as a separate entity for the shareholders to claim limited liabilities. To keep limited liabilities the corporation must:
- Schedule and hold annual meetings with the board of directors and shareholders
- Keep the minutes of the meetings
- Keep a copy and require all corporation documents to be signed only in the corporation name
- Open and keep a separate bank account in the name of the corporation only
- Deposit all income taxes withheld from employees in the appropriate account
- Keep a record of all financial transactions in detail
- File corporation income tax returns
Corporate Income Tax
Corporate income tax returns must be filed like any other individual income taxes, only they will be filed in the name of the corporation, not the owner. Corporation income taxes are paid on the net profits remaining after all expenses are paid by the corporation. These expenses include wages and salaries of all employees, even the owner if he works for the corporation. Other expenses are employee bonuses, inventory and overhead expenses paid by the business. After all the expenses are deducted, then income taxes will be figured on the remaining profit. Corporations file income taxes on IRS Form 1120 and are subject to special corporate tax rates.
If you have questions or need further help in forming a corporation for your business, you should contact a corporate business lawyer for more information.
- Business, Corporate & Nonprofit Law
- Incorporation
