Business Structures Defined: The Corporation

The corporation is America’s most popular and oldest form of business entity. As such, corporate statutes have had the opportunity to evolve over the years and have become quite uniform throughout the states. Today, the most popular forms of corporation include the “General-For-Profit Corporation (or, C-Corporation)” and the “S-Corporation.”

Corporations (C-Corporations)
The label, “C-Corporation” merely refers to a standard, general-for-profit, state-formed corporation. Characteristics of the “C-Corporation” include the following:

Separate Legal and Tax Life
A corporation which is properly formed and operated as a corporation assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at its own corporate income tax rates and files its own corporate tax forms each year IRS Form 1120.

Management and Control
Normally, a corporation’s management and control is vested in its board of directors who are elected by the shareholders of the corporation. Directors generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons. Thus, transactions with third persons and day-to-day activities are conducted through officers and employees of the corporation to whom authority is delegated by the directors of the corporation.

Shareholders
Shareholders are the owners of a corporation. Although shareholders have no power over the corporation’s daily activities, shareholders possess the ultimate power in that they can appoint or remove Directors of the corporation.

Directors
The Board of Directors is responsible for the long-term management and policy decisions of the corporation. While the Directors are considered to have the highest level of DIRECT control over the corporation, there are, however, a few instances when the shareholders are required to approve Actions of the Board of Directors (e.g. amendment to the Articles of Incorporation, sale of substantially all of the corporate assets, the merger or dissolution of the corporation, etc…).

Corporate Officers
Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the following: (President, Vice-President, Secretary, Treasurer).

Management & Staff
Management and Staff are DIRECTLY responsible for the daily activities of the corporation.

One Person Required
In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.

Fringe Benefits
Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, Corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.

Corporate Formalities
To retain the corporate existence and thus the benefits of limited liability and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion. For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be taken, Officers must be appointed, and shares must be issued to shareholders. Most importantly, however, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any “foreseeable” business debts.

Shareholder Liability for Corporate Debts
Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may “pierce the corporate veil” and hold the shareholders personally liable for corporate debts.

Avoiding Double Taxation
Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder’s tax rate. However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occurs.

S-Corporation Election
Another alternative is to elect the S-Corporation Status. Please consult an accountant or C.P.A. who knows and understands the intimate details of your business along with federal and local tax rules so that you can make the best decision regarding which form of business entity (S-Corporation or C-Corporation) will best suit your needs.

Duration of a Corporation
As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers , or directors or by transfer of its shares from one person to another.

Constitutional Protections for Corporations
Although a corporation is not a “citizen” under the privileges and immunities clause of the Fourteenth Amendment to the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons: