A corporation is established pursuant to state law as a business entity that exists separate and distinct from its individual owner(s), who are called shareholders. Shareholders possess “shares” of ownership in the corporation, which may entitle the shareholder to a distribution in the company’s profits, to certain voting rights in decision-making processes and to other distributions if the corporate entity were to dissolve. As well, shareholders elect directors to serve on a board for a specified term. The board of directors oversees and enacts major decisions on behalf of the corporation. The board, in turn, selects officers to oversee the day-to-day management of the corporate business.
As separate and distinct from its owners, the corporate entity provides a layer of liability protection between the shareholders and the entity itself so long as the entity maintains what are known as “corporate formalities.” These formalities must be strictly adhered to throughout the corporation’s existence to maintain the veil of protection that corporate shareholders expect when investing in a corporation.
The first major step in the life of a corporation is its formation. A corporate entity is formed by filing Articles of Incorporation with the Secretary of State in the state in which the corporation is located. Once the Articles are approved by the Secretary of State, they must be recorded (i.e., placed on record) in county records. Additionally, a person must be appointed as the registered agent to receive legal notices on behalf of the corporation. Finally, the corporation must obtain a federal tax identification number, or FEIN.
The second major step is the corporate organizational meeting that occurs shortly after the entity has been formed. At this meeting, initial actions are taken to adopt by-laws, elect a board of directors and officers, and issue stock certificates indicating individual ownership in the corporation. All of the actions performed at this meeting are documented as minutes and placed in a corporate book, which becomes the major source of information for establishing that corporate formalities are being met. Throughout its existence, the corporation must file an annual report with the Secretary of State and maintain minutes summarizing the actions taken in its annual meetings.
As referenced above, corporations are separate legal entities. As separate entities, they are required to file annual tax returns and pay tax on reported taxable income. The Internal Revenue Code, however, provides an option for smaller corporate entities. This option allows so-called “S Corporations” to be treated like partnerships for tax purposes, wherein the income or loss from the corporation is passed through to the shareholder(s). The decision to elect this type of treatment is complex and requires a thorough evaluation of the corporation’s financial information.
Corporations may be composed of as little as one shareholder to as many shareholders as the corporation authorizes. Additionally, corporate entities may be privately held or publicly traded. In any case, it is crucial that the relationships among shareholders, directors and other key figures be clearly defined and regulated by well-drafted agreements. The various agreements that govern a corporate structure provide the framework as to how all of the components of a corporate entity fit together into a unified and profitable business structure.
The components of the corporate structure highlighted above provide only a general sketch of what it takes to maintain and operate a corporate entity. This process should not be taken lightly and should be entered into with competent legal and tax advice.