A corporation is a legal entity in a separate existence from its owners. Creation of a corporation occurs upon proper completion of articles of incorporation and their filling with the proper state authority. The process also includes the payment of various hefty fees. There are some companies which can assist you with the process of incorporating a business. If you incorporate through Business Filings Incorporated, for example, all you need to do is complete the online order form, and Business Filings prepares and files your articles of incorporation. After your articles are filed, your corporation must hold a meeting where bylaws are adopted and the incorporation process is fully completed. Share certificates should be distributed to shareholders and the transactions should be recorded on the corporation's stock ledger. All of this information should be kept in a corporate record book.
Although an attorney is not a legal requirement to incorporating a business, and you can prepare and file the articles of incorporation yourself , you should clearly understand the requirements of the formation of your state, prior to getting involved in the process.
Only one director of the corporation is required in most states, but you can choose to have more. Some states use the number of shareholders in the corporation to determine the minimum number of directors. If the number of shareholders is three or more, then the corporation must have three directors. If the corporation has less than three shareholders, then the number of directors may equal the number of shareholders.
Advantages of incorporating a business
- Shareholders and directors are not liable for the debts and obligations of the corporation
- A corporation's life is not dependent on its members. It possesses the unlimited life. If an owner dies or wishes to sell his or her interest, the corporation will continue to exist.
- Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
- Ownership of a corporation is easily transferable.
- Capital can be raised more easily through the sale of stock.
- A corporation possesses centralized management.
Disadvantages of incorporating a business
- More deliberate record keeping requirements.
- Operating a corporation across different states often requires the corporation to qualify to do business in the other state.
- It ’ s more expensive and complicated to form a corporation.
- Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder.
The last disadvantage may be evaded by incorporating an S corporation. An S is has a special tax status with the IRS which allows the corporation not to be a separately taxable entity. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship; the income is "passed-through" to the shareholders. Thus, shareholder's individual tax returns report the income or loss generated by an S corporation.
In order to qualify for S corporation status, the S corporation can have no more than 75 shareholders and must make the election to be an S corporation. The shareholders cannot be non-resident aliens.
By Vanina Sloan