A corporation is a legal entity that exists separately from its owners. This means that its life is not dependent upon its members and possesses unlimited life. If the company’s owner dies, for example, the corporation will continue to exist and conduct business. Many business owners decide to incorporate their enterprise because retirement funds and qualified retirement plans like 401k may be set up more easily, ownership is easily transferable, and funds can be raised more easily through stock sales.
A corporation is comprised of three groups: shareholders, directors, and officers. A corporation is owned by shareholders but is not directly managed by them. Shareholders work to influence corporate decisions through electing and removing directors and voting on major corporate issues. The directors make up the board of directors, and are responsible for managing the affairs of the corporation. Directors make major business decisions and supervise officers. Officers are responsible for the everyday management of the corporation and are usually appointed by the board of directors.
One of the main advantages of incorporation is the limited liability it offers its shareholders; they are generally not legally responsible for the debts and obligations of the corporation. Therefore, creditors will not come to them to collect debts of the corporation. This is contrasted to the shareholder liability in a partnership or sole proprietorship, where the owner's personal assets can be used to pay off business debts. Shareholders and directors must, however, follow all the rules of governance, including holding annual meetings and maintaining meeting minutes, in order to maintain this limited liability. That is why many incorporation services include corporate forms disks and corporate kits as part of their complete incorporation packages.
The business must determine which state the company will be incorporated in. A company can be incorporated in any state regardless of the company’s physical location, although if your corporation does the majority of its business locally, local incorporation is suggested. To decide on which state to incorporate in, compare the costs of incorporating in the state of the company’s operations to doing business as a foreign company in the state chosen. The cost of local incorporation is usually less than doing business as a foreign corporation. For example, a corporation from Georgia that qualifies to do business as a California incorporation is subject to taxes and annual report fees from Georgia and California. Next, outline the advantages and disadvantages of each state's corporate laws and tax configurations. Another disadvantage of having California incorporation on an out of state company is the possibility of having to travel there to defend a law suit.
Speaking of California, according to a study that attempted to explain why public companies choose to incorporate where they do, very few California public companies choose to have California incorporation. In fact, many choose to incorporate in Delaware; the same goes with most any company in the U.S. This is strange considering that California incorporation codes tend to be clearer than those of Delaware. What Delaware does have, however, is the most extensive record of judicial decisions as they apply to corporate law, making it the most predictable codes.
By Kelley Caner