Corporations: What You Need to Know

What Is a Corporation?

A corporation is a type of business structure that separates the business owners from the company. Referred to as a limited liability partnership, corporations are run by directors, officers and shareholders who all share a common interest in the business. Since corporations are set apart from the company overseers, the owners, directors, officers and shareholders’ personal assets are protected from liability. There are guidelines and regulations set in place to ensure corporations are operating in a fair and legal fashion. Furthermore, businesses must meet certain criteria in order to achieve incorporation status.

The Advantages to Starting a Corporation

Corporations offer several distinct advantages when compared to other types of business structures. In a corporation, the business owners and shareholders are not legally responsible for the company’s debts and business activities. Once the company becomes incorporated, the business is recognized as a separate entity, and the owners are no longer held liable. As a corporation, shareholders and other potential investors are able to purchase stock in the company. The company may also be able to offer stock shares to employees, which in most cases attracts a higher-caliber group of employee candidates. Employees and other investors like the fact that they are able to participate in the wellbeing of the business, and they receive a payoff when the company is successful. Corporations have an effective and powerful management hierarchy. With elected directors, officers, members and shareholders, each role has clear and structured responsibilities to carry out in order to make the business run smoothly. Business owners who feel as though their company would benefit from offering stocks to shareholders or who have a family business that they want to make gift shares to family members would benefit from incorporating their business. In addition, corporations are able to save money by keeping their profits within the company.

How Is a Corporation Formed?

There are several steps that business owners must take when incorporating a business. The owners must first create a name for the corporation, keeping in mind that there are restrictions with using certain words. Once the name is put in place, business partners must elect a board of directors. These important people will oversee the formation, development and operation of the business. In order to apply for incorporation status, company overseers must fill out and file the proper articles of incorporation paperwork and other necessary documents. Along with this paperwork, some states require corporations to create company bylaws, which act as a blueprint for how the company will be managed and operate on a daily basis. Once the incorporation status is in place, the company may choose to hold a board meeting. Members may discuss the structure of the company, elect corporate officers, manage stock options and talk about any other important issues surrounding the business. Keep in mind that the business owners may also need to apply for special permits or licenses that relate to operating a business in a specific industry. These licenses and permits may vary by state.

Understanding the Corporate Structure

The management structure of a corporation can be a major asset to the success of a business. Generally, the corporation is run by a board of directors, officers and shareholders. The board of directors are usually put in place when the company is formed, and in turn help with the organization of the company. These directors are ultimately responsible for creating the company rules and guidelines, and making decisions in the best interest of the business. Officers also act on the company’s behalf to ensure that the rules and regulations are being carried out properly. The officers include the following: Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Secretary. Each has a defined role to take care of legal contracts, operations, finances and records. People who want to invest in a corporation can become shareholders by purchasing stock. In some cases, shareholders may consist of a small group of people who own a part of the full corporation. Other larger companies, however, may choose to offer stock to the public. Corporations are often required to hold shareholder meetings at least once a year. When owners understand the process of incorporating a company, they may find that this type of management structure will be best for the future of their business.